The biggest challenge that these units face is raising the necessary funds for running their daily business smoothly. A business requires funds for every aspect, from buying or renting an office to stocking inventory and from hiring employees to expanding manufacturing facilities. Small business loans in India are offered by several banks, provided these SMEs meet certain stringent conditions and have assets to offer as collateral. Therefore, it is necessary for these businesses to look at alternative funding options. Read on to know about the ways in which you can fund your small business.
Sources of Funding for Small Businesses
Recent years have witnessed the emergence of several new players that are using the latest and most advanced technologies to increase the speed and accuracy of the loan approval process. These FinTech lenders have introduced an array of new products to meet the unique funding needs of different SMEs and new entrepreneurs. Here are ten ways in which a small business can raise financing to meet working capital or expansion needs.
- Small Business Loans from Banks and NBFCs: Most small businesses look to the traditional banking sector for necessary capital and short-term fund. Short-term finance is usually termed as loans, this source of financing often involves a lot of paperwork, stringent eligibility criteria, a long turnaround time for loan approval or rejection and the requirement of collateral.
- Government Grants and Schemes: The Indian government has launched several schemes to promote the development of small businesses. For this, they are offering loans, credits and grants to businesses engaged in specific areas or industries. Institutions like SIDBI, NABARD, NSIC and the recently launched Mudra are working to help small units secure funding easily.
- Angel Investors: Many high net worth individuals consider investing in small companies that exhibit huge growth potential. A business needs to connect with a network of angel investors, maintain documentation and prepare plans to convince these investors of their growth potential. These investors would receive a share in the equity of the small businesses for the funds provided by them.
- Venture Capitalists: Many venture capitalists look towards small businesses with high potential to invest in. They usually take a majority stake in these companies for the funds offered. Securing this type of small business financing is not easy and takes away the business owner’s control of the business and decision making.
- Borrowing from Friends and Family: Borrowing from friends and family is probably the oldest and cheapest forms of small business funding. However, there is no reliability and puts personal relations of the business owner at stake.
- Purchase Order Financing: Cash flows of a small business may be highly irregular due to varied factors including supply and demand gap and seasonality. Purchase order funding allows businesses to raise funds against purchase orders that they have received. It is used by businesses to buy materials to fulfill an urgent order.
- Crowdfunding: A relatively new source of small business funding, crowdfunding involves collating small amounts of funds from a large number of people, in order to fulfil the complete need for funds. There are crowdfunding platforms that promote small businesses and help raise the necessary funds through online payments. There is no need of collateral, although businesses do offer some gift or discount to those who contribute towards the business.
- Online Seller Finance: This is ideal for businesses that operate online and is perfect for funding inventories during peak seasons, sudden orders or expansion purposes. The funds are disbursed quickly and repayment is tied to the monthly sales. Online seller finance can be repaid on a fortnightly basis, allowing a business to repay parts of the loan as soon as there is cash, rather than being overburdened by hefty installments at the end of the month.
- Pay Later Finance or Credit Limit: Under this type of funding option, the lender reviews the business and accordingly sanctions a specific credit with multiple withdrawals allowed within that limit. This funding option allows the borrower to repay the amount as and when funds are available. The repayment of funds restores the credit balance for future use. This rolling loan product charges interest only on the amount used and not the entire limit sanctioned.
- Merchant Cash Advances: This source of funding is for new-age businesses that receive a large chunk of their payments via credit cards or point of sale machines. Lenders tie up with credit card transaction processors or point of sale card machine vendors and provide loans to small businesses. The repayment of these loans is linked to the credit card or POS machine receivables. This type of funding does away with the risk of not being able to repay the borrowed amount, as the lender secures the repayment by tying it with the receivables of a business.
By recognizing the importance and contribution of small businesses to the Indian economy, the government has increased its emphasis on helping these units gain access to adequate funds. Moreover, the government is encouraging digitization, both for receiving payments and raising funds. Most of the times, small businesses have immediate requirements of funds, as they do not have enough standing to ask for an extended credit period from their supply chain. Thankfully, technology has helped lenders to speed up the process of loan approval, which is critical to the survival and growth of small businesses. Furthermore, a large number of financial products have been launched to suit the varying needs of these businesses.