Small Business Funding Options and Explanation of 7 types of funding for Business in India

Introduction

Small businesses worry a lot about raising sufficient finance to keep their operations running smoothly. Any business’s first phase is critical, and for it to get off the ground and achieve traction in the market, it needs swift business capital. In this article types of funding for business is mentioned.

The interest rates on these loans are determined by a number of factors, including the type of lending authority, the type of business, credit rating, market trends, and the amount of loan requested. These loans range from short-term to long-term funding, and they can be renewed after a certain period if the company can pay the money back within the stipulated time frame. Here is a list of small company finance possibilities.

Why are bank loans so tough to obtain for small businesses?

Small firms find it challenging to obtain capital for a variety of reasons. It is not that banks do not want to lend to small businesses; they do; it is just that traditional financial institutions have an outmoded, labor-intensive lending process and rules that are adverse to small firms.

Because many small firms requesting loans are new, banks normally require at least a five-year profile of a healthy business (for example, five years of tax data) before making a loan offer.

Traditional business funding options

Small business owners may seek out business financing choices for a variety of reasons. Three of the most common are listed below.

• Traditional banks are nearly certain to reject customers with credit scores below a particular level, which varies by loan provider.

• Traditional loans demand additional qualifications that not all small business owners meet. Alternatives to business loans can help in these situations.

• Traditional bank loans might take weeks to approve, however some alternative business loans can provide financing in as little as one week.

Due to this reason, MSMEs opts for Alternative funding business options. Below is the explanation of 7 types of Alternative funding options for Business in India.

Types of Funding for Business

• Working Capital Loan Funding for Business

Small firms use these loans to cover their liquid liquidity demands in the near term. A working capital loan can be quite useful when cash is in short supply for daily operations. Business capital is often issued for a period of six months to a year, with interest rates ranging from 12 percent to 16 percent, depending on the credit risk of the company.

• Cloud Funding options Business

On a basic level, the concept of crowdsourcing is comparable to that of mutual funds. This decision involves more than one investor, each of whom contributes a predetermined amount of money based on your goal, business idea, profit-making goals, and plan of action. All you need is a group of people that are enthusiastic about your business concept.

Crowdfunding is growing in popularity since it ensures that other experienced participants in the market believe in your idea as well. Crowdfunding might also help you in obtaining critical money at the concept stage. You can raise funds through crowdsourcing from friends, family, and entrepreneurs that believe in your business concept and have the financial means to support it.

• Term loan Business Funding Options

Term loans are long-term loans taken out by a company when investors like a pitch made by a company and would be ready to fund that proposal for credit to meet a company’s capital expenditures if they were offered the complete amount. Small business financing has a set term and a reduced interest rate, and it is based on a company’s credit profile. These are usually secured by collateral, however, they can sometimes be offered unsecured. They can last anywhere from 15 to 20 years and have a fixed or variable interest rate.

• Bootstrapping for Startup Business in India

Self-funding, often known as bootstrapping, is a good approach to get money for a Startup, especially if you are just getting started. First-time entrepreneurs have a difficult time collecting funding if they do not have any traction or a plan for success. You can invest your money or enlist the help of relatives and friends. Due to less formalities and compliances, as well as cheaper raising expenses, this will be simple to raise. Most family and friends are willing to negotiate an interest rate with you.

Self-financing or bootstrapping should be considered as a first funding option due to its advantages. You are intimately bound to the corporate world once you have your own money. At a later, investors will see this as a positive feature. However, this is only appropriate if the initial requirement is limited.

• Angel Investment business funding option

Angel investors are individuals with extra income and a strong desire to invest in new Businesses. They also collaborate in groups of networks to screen proposals jointly before investing. In addition to funding, they can provide advice or mentoring.

Many well-known companies, such as Yahoo, Alibaba, and Google, were founded with the support of angel investors. This type of investment is most common in a Company’s early phases of development, with investors expecting up to 30 percent equity.

• Venture Capitalist

Venture capitalists are a sure choice for huge bets since they offer professionally managed funds that are seeking for Startups with a high chance of success. The best part about venture capital investments is the knowledge and oversight that comes with them. VCs (Venture Capitalists) frequently invest in stock and then depart after the company is acquired or goes public.

Typically, venture capitalists seek out firms with sufficient traction and a competent team. However, if you pick venture capital investment, you must be willing to accept their recommendations and adhere to their tight guidelines.

• Government Programs

The Pradhan Mantri Mudra Yojana is a scheme that provides funds to small and medium-sized businesses. Commercial banks, cooperative banks, NBFCs,  MFIs, RRBs, and other financial institutions give these loans. The loans in this system are separated into three categories: Shishu, Kishore, and Tarun, which correspond to the various stages of business development. Shishu stage loans start at INR 50000, while Kishore and Tarun stage loans range from INR 50000 to 5 lakhs and INR 5 lakh to 10 lakhs, respectively. These loans can be used to purchase a vehicle, or purchase a plant, raise operating capital, equipment, or machinery and do not require any collateral.

Conclusion

Obtaining capital for your company through typical bank loans can be difficult, and these alternative funding methods might save you time and rejection along the route. Whatever funding methods you pick, having a sound business plan to backup your company and improve your chances of obtaining funds is important.