Funds for a small business are mandatory to start something. A start-up company is created with a focus strategy on a niche market and grows up to serve a potentially huge market. With medium to low resources initially, these businesses required funds to expand and grow in a competitive market. Challenges for landing capital for a growing company, though limited, could be exciting as well. Entrepreneurs cannot escape them but, by knowing what they are, can at least prepare for them.
Did You Know? As of September 2022, India is home to 107 unicorns with a total valuation of $ 340.79 Billion. Out of the of unicorns, 44 unicorns with a total valuation of $ 93.00 Bn were born in 2021, and 21 unicorns with a total valuation of $ 26.99 Billions were born in 2022.
How to Raise Capital for Your Business?
It is not easy to get substantial funding for your business initially, but having huge potential could attract an active funding proposition for your business. Here are a few ways to fund your start-up or small business -
Ways to Fund a Small Business
There are many ways to fund your business, but what are they, how do they work are probably some questions that you may have. We’ll explore all that so that you can better understand these methods and choose the one suitable for your business.
Equipment and Invoice Loans
Manufacturing operations are capital-intensive and require a huge sum of money to finance the setup of plants and machinery for the manufacturing process to start with. The best course of funding could be to finance the assets on credit. The loans are agreed upon for a duration of 5 to 7 years at a nominal interest rate. These loans may be secured by a charge on the asset of the company, usually the asset under purchase. The creditor, in exchange, in certain cases, may get equity interest in the company.
Seed capital is nothing but the early stage of investments by the company's promoters to kick off the business idea. It is effective since the promoter shows confidence in the idea of the business by investing his own money or arranging from a private estate without seeking any external funding source.
Funding, your business from extra or idle surplus after all current obligations, have been met is one of the oldest forms to finance your growth and expansion plans. However, It is quite impracticable for small businesses since they have little to no surplus in their businesses due to huge competition from already established players in the marketplace. However, Self-funding may prove to be effective for businesses with huge growth potential followed by current earnings to finance future plans.
Crowdfunding for business in India can be another alternative to finance the growth of your business. It is one of the most effective forms to arrange funds since investors may usually end up being someone you know, like your relative. It is similar to a mutual fund where small investors contribute to your business in exchange for relatively small equity interest. It is easy to convince the people you know about your plans. Thus, Crowdfunding is getting popular owing to its benefits.
Angel investors could be very well defined as someone with a high net worth having surplus cash to invest in your business. They are like any other investor who would be more interested in your business model, how you could scale up your business to a potentially large market, the growth projections, profitability, etc. They invest in your business in exchange for a certain equity interest in your company. It is quite evident that angel investors usually invest early in the start-up and could hold their investments till public listings.
Also Read: How to Start a Successful Business in India?
Venture Capitalists are not a different group, but it is a firm, usually LLP, of individuals that have a high net worth who invest in companies for an exchange of equity interest. They have an abundance of cash and liquid funds owned by their partners. Venture capitalists usually have tendencies to appoint their own individuals to the board of the company to exercise control over the company and also to protect their own interest, that is, the fund invested. They finance risky ventures and support them to grow and expand. They are also popular know as VCs in the capital market.
Loans Credit from Banks
Another way to finance your business is to use debt in place of equity. Debts are easy to get when your business has growth potential and is currently earning well. The most substantial benefit of debt financing is to hedge the ownership stake in your company. If you are a person who wants complete control over your business affairs, the best alternative is to finance your company from borrowed funds rather than losing your equity interest. Since debt funds require the interest to be paid, startups usually have losses, and thus, they can’t finance through debt securities.
Working Capital Loans
Working capital loans are short terms credits to finance the ongoing operation of the company rather than used as funds for expansion as expansion plans are made for the long-term needs of the business. Working capital loans are granted after a detailed analysis of the borrower's creditworthiness, and a part of the inventory is also taken as collateral security on floating change by the banks. The rate of interest for working capital needs is usually high owing to the short-term duration of the loan.
A business incubator is a company or a firm that helps businesses to set up their operations like hiring office space, funding, staffing, etc. Business incubators have expertise in their operations in terms of experience, resources, and management. There are various business incubators that also help start-ups to get initial funding at the early stages.
Governments are vocal about small businesses. Various schemes help businesses get loans at a very reduced rate of interest, usually for Micro, Small, and Medium Enterprises (MSMEs). Among the very popular government schemes, Pradhan Mantri Mudra Yojana is one of the most prominent schemes promoted by the government of India. Here are a few categories of the loan scheme -
- Shishu Loan: Business loan eligibility is up to ₹50,000
- Kishore Loan: Loan amount eligibility varies up to ₹5 Lakhs
- Tarun Loan: Loan amount eligibility varies up to ₹10 Lakhs
Funding from Contests
Contest winning is one of the most emerging ways to finance your businesses. These contests work as a tool of motivation for start-ups who are struggling to get funds in their early stages. These contests are designed to provide the most promising business with the funds they require by competing for the various businesses on a platform of live TVs. The product or business idea which stands out from the other competitor gets the funding in return. One should be well prepared for these contests in advance before participating in negotiating the best deal. For instance, pitching for business contests.
Non-Banking Financial Institutions also provide business loans on easy and favourable terms at a very nominal interest rate. They are very effective for small businesses that struggle to arrange funds from other sources. They are usually paperless or required minimal documentation to disburse the loan amount to the borrower.
Growth is one of the prominent motivations to step ahead in life. Businesses are no different but they also required funds to grow and expand into new markets or with new products. It becomes important especially for startup companies since they usually have little to no capital at all to even kick off the idea, all they have is the business idea or business model. Finding investors for your startup is not easy however with enough effort things can get in your favour. We have discussed the various alternatives to fund your business. You could choose the best alternative out of the all above based on pros and cons. Hope you enjoyed reading it so far.
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