Funding Options for Small Businesses and Start Ups

Finance or Capital is the backbone of every business. It is required to start a business, running premises, paying for marketing and advertising, paying staff salary, paying suppliers of raw materials and other goods and services, expand business operations and create brand value. If a company lacks finance, it would directly impact their daily operations in the form of a working capital crunch, reducing its asset holding capacity, impairing its ability to maintain sufficient inventory or cause delays in sourcing raw material/ expertise and generally result in slowness and stagnation across various business operations.

New companies often have a lot of trouble raising money because they have few clients and many competitors. They also have a risk of becoming insolvent or being unable to meet demand versus supply, running a risk of being unable to repay lenders. The source of finance chosen depends upon the type of business. Initially the only source of funds might be owner's savings, retained profits and borrowing from family and friends

Businesses and Companies can also explore other means of funding such as:

1. Crowdfunding

Crowdfunding is like taking a loan, pre-order, contribution or investments from more than one person at the same time. All you must do is detail things like, business goals, revenue generation models, amount of funding needed, etc. of your business on a crowd-funding platform. Potential investors can choose to invest a small part of the amount required by you or make an online pledge of pre-buying your product. Crowdfunding is a great way to create a buzz about your upcoming business and understand the demand your products may eventually generate, especially if you are unsure of the demand for your product.

2. Angel Investment

Angel investors are individuals with surplus cash, knowledge of the markets and an interest to invest in upcoming start-ups that may transform into cash cows. They also work in groups, prominent among them being the Indian Angel Network. Angel investors prefer to take more risks in investment for higher returns and have helped to start up many prominent global companies. This alternative form of investing generally occurs in a company's early stages of growth, with investors expecting upto 30% equity share in the business.

3. Venture Capital

Venture Capital Firms are professionally managed funds who invest in companies that have huge growth potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and help evaluate a business from the sustainability and scalability point of view. They also help make important connections in the industry, paving the way for more business.

4. Business incubators and accelerators

Start-ups in India have recently started considering Incubator and Accelerator programs as a means of funding. Incubator programs assist start-up businesses in most major cities to gather momentum and provide tools, training and network to businesses. Accelerator programs are more or less the same thing, but unlike incubators, they help the business grow, help develop connections with mentors, investors and fellow start-up entrepreneurs, thus assisting networking and business development.

5. NBFCs/ Financial Institutions/ Banks or Microfinance Companies

This form of financing is the traditional form of financing. This approach involves taking a loan from an NBFC (like Hero FinCorp), Financial Institution, Bank or Microfinance Company. These agencies provide both secured and unsecured loans, whose approvals are based upon the promotors credit worthiness or the expected future cash flow generation capacity of the business in question. Such finance is called debt financing or loan financing. The process is quick, hassle-free and usually takes 5-10 business days.

Bootstrapping

Self-funding a business, also known as bootstrapping, is the most effective way to finance a start-up, especially when you are just starting your business. New entrepreneurs often have trouble finding funding without showing an ability to hustle and drawing up a plan that is bound to succeed despite market fluctuations. Bootstrapping would involve making investments into the business from your own savings or getting help your family and friends. There are barely any formalities and compliance issues , and these funds may be borrowed interest free. however, if you are going to bootstrap your business, then do keep these things in mind:

1. Stick to a business domain you know. Don't risk money an untested idea.

2. Build a plan around the budget you have. Don't indulge yourself as it may lead to failure at a later stage.

3. Make careful investments until you have a steady stream of clients and income.

4. Choose a business model that will generate payments in the short to medium term.

Capital is essential for the growth and survival of a company. You may lose out on many opportunities to grow and develop due to lack of funding. There are many options available today, so no matter what your company size or credit score. Go ahead and make your #Dreams come true!!

If you are a small business aiming to make it big? Then you should read our previous blogs on SME Loans as well:

1. Small business loan - how to get one?

2. Simplifying Business Loan Documentation

3. Guide To Understanding Working Capital Loans