So your business plan is ready; you have registered your business, and are now looking to raise some funds to launch your baby in the market. But it’s a jungle out there, and you don’t know which is the best step to take to fund your business.
From an investors perspective, small businesses fail at a higher rate than big companies, making it riskier and expensive. This is a significant reason that small businesses have less access to credit compared to larger companies.
Despite all the barriers, there are various financing options available for small companies. Here are some of the options available to you.
We understand that you have an emotional attachment with the gold jewellery in your locker. But this is just the time that you need to tap into your own personal stash that can be your seed capital for your own business. Stocks, mutual funds, real estate or jewellery – you can sell the assets or take a loan on any of the assets.
You can also invest your personal capital in the business as equity capital, or give credits to your own company. The best part about your own money is that it has no strings attached to it and you have the full freedom to do what you want. Personal saving is an excellent place to start, but you may not have the optimum amount of money needed to start the business. Also, make sure that you don’t tap into emergency funds to fund your own business. If you don’t have enough capital, look at the next option.
Another way to self-fund your business without losing sleep over loan repayment is to bootstrap your business. Bootstrapping is when you use the cash generated by the business to keep it running and growing. This is considered the ideal way to run a business as you retain complete control of the company. Although the flip side is that money is limited, and growth for your business may be slow. Beware that during economic uncertainties, cash flow may dry up, making it difficult to run the business.
Friend and family fund
If self-funding and bootstrapping don’t cut it for your business, you can also raise money from your friends and family members. This will allow you to have access to a more significant sum of money, without losing any control of the company. Such investment generally takes place on a personal level, and you have to return the money in a short time or depending on how comfortable your relationships are. Your friends and family may lend money to your business in the form of a loan or may be willing to take an equity stake in the company.
If your company is unable to get a business loan, why don’t you consider getting a personal loan? Just remember that you must have a good credit history for raising a personal loan. You can also avail a personal loan by mortgaging home, jewellery, assets, etc.
Small business loan
Small Industrial Development Bank of India is an institution dedicated to providing loans only to small businesses. The main target of such institutions is to lend money to small businesses who have not been able to obtain financing on reasonable terms through normal lending channels.
Private equity firms
Private equity is a type of equity capital that is not listed on any stock exchange. These firms raise funds from investors and then invest these funds to buy capital of promising start-ups and small businesses. The drawback is that the private equity firms will acquire a controlling position in a company and then look to maximise the value of their investment. Thus, you might not have sole control over your business decisions, which may lead to conflict. But hey, no pain, no gain.
You have heard of angel investors, haven’t you? Well, an angel investor is someone who funds businesses for equity in the company and generally forms the first level of institutional investment. Angel investor can play a very positive role in terms of providing greater credibility and mentorship to the business. The investment by an angel investor is generally small, but two or more investors can join to invest a more significant amount and to mitigate the risk of investing in a small company.
Venture capital firms
Venture capital firms are a type of private equity firms, but provide funds to only companies that are in the early stages of their business cycles. They basically invest in emerging start-ups with high growth potential in exchange for equity, or an ownership stake. All you need is to be armed with a great business idea and skills to sell.
Banks and non-banking financial companies
You can still walk the traditional route of debt financing where a bank or a non-banking financial company (NBFC) extends a loan to your business that you have to repay with interest. You will have to submit a business plan which will serve as the basis of the lending decision. The only flip side is that you will have to pay the principal and the interest on the loan regardless of the situation of your business.
Some small businesses might have suppliers willing to sell on credit. Such credit may range over any decided period of time. This is an inexpensive method of finance for small companies to fulfil short-term funding needs.
Alternate sources of finance are a recent phenomenon that has gained popularity. Alternative finance like peer-to-peer lending, where individuals and businesses can borrow money through online services that match lenders and borrowers based on interest type, has proved to be beneficial for small businesses who are struggling to raise money from banks and NBFCs. In this model, individual lenders extend cash as a loan to small businesses through an online portal. Much like other types of loans, an entrepreneur has both the pros and cons to contend with before taking a loan or funding through alternate modes of financing.
Thanks to social media, many businesses find it fruitful to raise finances through crowdfunding. Here, you can raise funds by borrowing a small amount of money from a large group of people. Such financing is usually project-based. The benefit of crowdfunding is that you can make flexible proposals as per your requirement. The best part about is that you can reach absolute strangers who identify with your project or business and may be willing to contribute. Through crowdfunding, it became easier to reach a number of people by putting minimum effort.
So, there you go. Getting your business funded has never been easier.