As a small business owner, you might be in need of funds at some stage or the other during the whole business life cycle. It might be for business expansion, hiring new employees, for buying new machinery and equipment, etc.
But before you choose a funding option it is important that you remember some things.
When do you exactly start looking for funding options?
You as a small business owner are well aware when you need funds for your business but it is necessary to consider the pros and cons of taking this step so that the funds are properly utilized for the purpose they will be taken. The purpose can be hiring more experienced professionals, expanding your business to other locations, to buy more inventory, refinancing old debts, for working capital, etc.
Decide how much funding you need
You will first have to decide how much funding you need for your business and the reason you need it for. To decide how much funding is required for the business, you have to keep monitoring your business. Take help from an accountant if required, do a profit and revenue estimate for the coming three or six months or even a year.
For a small business in India, there are funding options like Angel investing, Working capital finance, Term loan, Equipment & Invoice loans, Cloud funding & Crowdfunding, Partners & Venture capital, Government schemes, and bank loans.
Funding Options Available For Small Business Owners!
1. Angel investing
Angel investors invest in a business which they believe to be profitable. But before approaching an angel investor it is necessary that you prepare a proper business plan.
2. Working capital finance
A small business can fulfill its working capital requirements, through working capital financing.
1. Working capital loan
A working capital loan is a part of working capital financing.
Working capital loans are basically over a short or medium term, to fulfill the cash requirements of businesses who are looking to grow their business. The amount of a working capital loan depends on the eligibility of the small business.
If you go for secured working capital loans, you will have to give an asset as collateral. But you can approach NBFCs and other such financial institutions for unsecured loans based on the loan requirements and your credit score.
An overdraft means extending credit from a lending institution when an account reaches zero. It allows a small business owner to withdraw money even when the account has no funds or not enough funds to cover the withdrawal. Overdrafts are often used as a backup for unexpected expenditures.
The downside is that they often have low credit limits, which might hamper your plans. They are a form of unsecured lending, so even if you get one, the limit is likely to be fairly low unless your business has a strong credit history.
3. Revolving Credit Facilities
This is a line of credit which can be opted by business owners where the owner will pay a fee to use the funds when they are needed.
Before issuing the revolving credit facilities, the lenders consider some factors like reviewing the company’s balance statement, income statement and statement of cash flows. This facility is convenient and flexible, hence has a higher interest rate as compared to traditional loans. Revolving credit usually comes with a variable interest rate that can be adjusted.
4. Invoice Financing
Invoice financing for small businesses is a way to borrow money based on the amounts that are due from customers. This helps businesses improve their cash flow, pay their employees and suppliers, and re-invest in growth operations earlier rather than waiting until their customers have paid them.
Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money. Invoice financing can solve problems like customers taking a long time to pay and also difficulties obtaining other types of business credit.
5. Asset Refinancing
This allows a business to refinance an asset that they already own, to free up the additional working capital. The business will have to make monthly payments been decided over the next few years. Asset refinancing is often available on equipment and machinery that was financed or bought.
But an asset refinancing is only mostly available on assets that your company owns.
6. Merchant cash advances
A Merchant Cash Advance provides some advance cash on your future credit card transactions. The lender will provide your small business with a specific amount of money along with a signed agreement that you will pay the full money back, with fees and interest. Instead of making payments, the advance money is paid back gradually and automatically as your credit card processor forwards a part of your daily credit card sales to the merchant cash advance lender. The advance is approved based on the volume of sales which determine the amount of money you are qualified for.
A small business can qualify for a merchant loan if,
- It is a new business and will not be able to go for a traditional loan
- The credit rating of the business is too low to be eligible for a business loan
- The business does not have sufficient assets to provide as security
- The business is seeking financing on a short-term basis
- The business needs flexible repayment terms
7. Tax bill funding
If your small business has a tax bill that is affecting the working capital, this is funding available specifically for paying tax. Getting a loan for the tax bill allows the business to spread the amount over a longer period, which frees up cash for other important matters.
3. Term loan
Term loans are long-term loans where the lender is willing to finance any business idea for credit to meet any capital requirements of a business. These have a fixed duration with a lower rate of interest and depends on the credit history of the business. These can be secured as well as unsecured and can be anywhere between 15 to 20 years with a fixed or variable rate of interest.
4. Equipment and invoice loans
Equipment loans are for businesses with manufacturing processes. Banks offer equipment loans for the purchase of any essential or costly equipment that can range up to 25 Crore, with some banks also offering up to 100 Crore. Duration of these loans is from 4 to 5 years with a lower interest rate with a piece of equipment taken as security along with some additional security.
Invoice loans are offered for raising capital due to the time difference between raising an invoice and getting paid. Banks offer such loans at 80% of the amount of an invoice and the rest is due when an invoice is fully paid. A small amount of processing fee and a lower amount of interest is deducted.
5. Cloud Funding and Crowdfunding
Cloud funding is a way of getting financing for a business through a number of investor groups allowing you to share your business ideas.
Crowdfunding is a group of small business financing individuals that help your business ideas reach various prospective investors through various platforms. These investments can either be on debt or equity basis. Crowdfunding allows to reach out to a pool of investors, instead of one big investor.
6. Partners & Venture capital
Partners can prove to be a great source of raising capital for a business as they provide their resources for helping other businesses. These partners also have the option to become an employee of the business.
The venture capital, on the other hand, is a firm that provides funds for small businesses for the initial stages of a business. These firms usually invest against equity and are no longer a part when there is an acquisition. They also provide mentoring and evaluation services for a business to sustain.
7. Government schemes
There are government schemes like CGS, SMILE, Credit Link Capital Subsidy Scheme For Technology Upgradation, NABARD, NSIC, Mini Tools Room And Training Centre Scheme, Market Development Assistance Scheme, Technology And Quality Up-gradation Support, Mudra loan scheme, and Stand-Up India Scheme.
1. The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS)
The CGS scheme is collateral and works in the form of working capital finance as well as term loans for an amount up to Rs. 1 crore.
2. Small Industries Development Bank of India Loan for Small Enterprises (SMILE)
SIDBI plays a crucial role in the promotion and development of small businesses and has schemes like Mahila Udyam Nidhi, Integrated Development of Leather Sector Scheme, National Equity Fund, Promotional and Development Activities, and Technology Development and Modernization Fund Scheme.
3. Credit Link Capital Subsidy Scheme For Technology Upgradation
This scheme extends 15% capital subsidy to small scale industries for credit availed to upgrade their plant, machinery, and equipment.
4. National Bank for Agriculture and Rural Development (NABARD)
This scheme is basically to promote agriculture-based businesses in rural areas.
5. National Small Industries Corporation Limited (NSIC)
This scheme is to import costly machinery on a hire-purchase basis. The scheme is also for distribution and supply of imported and indigenous raw materials along with the export of the output of small scale industries in the country.
6. Mini Tools Room And Training Centre Scheme
The mission of this scheme is to provide technical support to small businesses and also training in tool design as well as tool manufacturing in order to create a skilled workforce, engineers, supervisors, and designers.
7. Market Development Assistance Scheme For MSMEs
This scheme helps MSMEs in finances for participating in international exhibitions and trade fairs under MSME India kiosk.
8. Technology And Quality Up-gradation Support To MSMEs
The mission of the scheme is to make sure that the manufacturing MSMEs are working towards energy-efficient manufacturing processes and technologies to reduce manufacturing costs.
9. MUDRA Loan Scheme (Micro Units Development and Refinance Agency Ltd)
The maximum loan amount offered under this scheme is divided into 3 parts, Shishu loan (Rs. 50,000), Kishor loan (from Rs. 50,000 to Rs. 500,000), and Tarun loan (from Rs. 500,000 to Rs. 1,000,000).
10. Stand-Up India Scheme
This scheme is to provide easy, convenient, cheap and collateral free loans to a scheduled tribe and scheduled caste women entrepreneurs in order to promote micro-enterprises. Granting loans from Rs. 10 lakhs to Rs. 1 crore with a tenure of 1 year to 10 years.
8. Bank loans
Banks provide secured loans to businesses and the interest rate depends upon the credit score and the fulfillment of the eligibility criteria.
NBFCs are financial institutions that offer loans to small businesses at affordable interest rates. The procedure to apply for a loan is simple as it is mostly online and the loan disbursal is also faster as compared to traditional bank loans.
Unsecured loans are also a good option for small businesses which are mostly offered by NBFCs in India. There is no security involved in unsecured loans.
If you are looking for some funding options for your business, contact Gromor Finance for quick loans at attractive interest rates!