How would you fulfill your small business financing needs?
Are you looking towards starting your own business? If yes, then the most important thing on your mind must be arranging the funds. You will see that fund requirements would be there at various stages of the business. When you start the project initially, you need a significant amount of capital. When the profits start coming in and you think of expansion, you require funds again. At some point in time, if there is a loss, you need financial support for recovery. Read on to know more about sources of small business financing and their advantages.
While setting up a small business, you can consider the following sources of capital.
Following Source of Capital
Personal assets and savings
This is the most common source of small business financing as you have easy access to it. They include your house, property, valuables, stocks, mutual funds, bank balance, etc. At any stage of your business, when you are in urgent need of capital, you can take a loan against your assets. Alternately, sell them off to meet your monetary requirements. Do not invest your entire savings or personal asset as you may need them as a backup for the future. A good option is a small business loan along with a part of your savings or assets.
Loans from friends or acquaintances
You can take loans from your friends, relatives, or family but they need to have adequate cash for lending. Remember to pay them back as soon as you start making profits. You may ask them to take an equity stake in your firm which would be beneficial for everybody. Make additional arrangements of finances apart from this. It may not possible for them to provide funds every time during different stages of your business.
In India, there are banks and financial institutions that provide loans, especially for small businesses. Their main purpose is to issue loans to businesses that are unable to get funds from other sources. For getting bank loans, you have to fulfill certain criteria that the banks would require. You can These criteria are related to the earning potential, credit score, or annual turnover of your business. You can choose from different types of loans like term loans, working capital loans, loans against property, etc.
In case you are unable to get a business loan, you may consider taking a personal loan and using it for your business. One condition is that you must have a good credit history. You can get a personal loan against your assets.
Government loan schemes
There are several loan schemes under the central and state governments that you can avail of for the fund requirement of your business. You have to provide certain loan-related documents and verification of your goods and services tax. Also, provide your KYC (know-your-customer) details and bank history of at least six months.
It is a B2B (business to business) agreement. You will find that some of your vendors or suppliers are okay to provide you with material on credit for a few months. This is a convenient and low-cost method to meet your short-term funding needs. But you have to complete the payments within a specific period of time. The transaction would be recorded through an invoice and you do not have to pay any interest on this type of credit. The period up to which you can delay the payments will depend on your negotiation skills. Mutual trust between you and your supplier has an important role in this case.
Private equity (PE) firms
PE capital is not listed on stock exchanges. The firms dealing in them collect and invest funds from investors in small businesses like yours. Choose your PE partner carefully as their main intention is to maximize their returns. Sometimes, they will try to acquire a controlling position in your firm and interfere in the business decisions. This may lead to conflicts if your plans differ from theirs.
Venture capital (VC)
Firms dealing in VC work in a similar way as PE firms but there are certain differences. Venture capitalists will fund your business only during the early stages. They would provide funds in several rounds against an ownership stake or equities in your business.
It is a new method compared to other sources. Small firms like yours can raise funds by asking people to invest small amounts. It will be better if you can collect funds from a large group of people. You can make flexible proposals depending on your requirement like taking the money as a loan or offering equity to the investors. Pay simple interests to your lenders on the loan taken. Crowdfunding is popular because you can attract a large number of investors by putting out advertisements through social media.
You have to arrange for finances and also make their optimal use in order to run your business well. Nowadays, it is easy to get loans for commercial purposes. Go through the various options that are available and choose suitable sources to meet your small business financing needs.