Any business requires a steady flow of funds to grow and sustain. A strong financial backup can help in guiding business in the right direction and for being able to make smart and strategic decisions. Funding a business not only helps in paying expenditures regarding machinery, goods or operational activities. A strategically planned business loan can also help the company to grow and be more profitable.
Business finance is usually generated from three different categories – firm’s operational earnings, financing from investors like the owner, partners and capital; and lending institutes or authorities who provide funding. Whenever a firm faces a cash crisis, it needs a business loan to survive and develop further in the future.
Why Business Funding is Important?
Liquid cash keeps a business flowing between its sales, purchases and debts. Whether a business has just started or it has been in business since years – maintaining revenue cycles is crucial to its growth. Expansion of business, recruiting new employees, purchasing costly equipment and plants, taxes, and rents – every payment requires some extra working capital.
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Here are some reasons why funding a business loan could be beneficial for your business:
1. Achieving Various Targets
A business sets different goals for both short-term and long-term periods. The evaluation is based on how well it is capable of managing its finances. Often, businesses find themselves in the middle of a liquidity shortage which could hinder the growth of a business. Even if a business has restricted funds, it should be covered by insuring them externally. The insurance can be obtained for debts and liabilities, accidents and vehicles to secure them from any unfortunate instances.
2. Planning Short-term and Long-term Activities
Businesses often face a shortage of liquid cash to pay their short-term expenditures and hence need finance for business. The creditors of the businesses need their payments for providing raw material and services. If there are not enough funds to meet these demands, it can result in shortage of stock. Having a healthy working capital can help businesses to prepare budgets, predict the cash flow and finances needed to meet them. However, businesses must not always rely on short-term financial resources which can halt long-term projects and requirements. Long-term funding can be facilitated using savings or availing bank loans. Funding for long-term needs cannot be done through short-term resources as it might hamper short-term goals. Capital budgeting is a crucial part of businesses and hence may need finances that can be funded through business loans.
3. Meeting Financial Goals
Businesses have a set vision about achieving their financial goals. The vision depends a lot on how they manage and prioritize their resources. The restricted amount of funds eventually shapes up a business’s objectives. Whether it’s a short-term goal to increase the financing of sales or expansion of capabilities to manufacture – you need business finance.
4. Analyzing Financial Statements
Financial statements can be better analyzed if businesses have appropriate financial resources. Adequate financing can help businesses in making significant decisions related to the expansion of a business, recruitment and employing, promoting and marketing and many others. Financial statements are the evidence of how well the revenue cycle of a business is coming along. Saving business cash, excellent credit and prudent investing decisions – everything can be made simpler by employing business finance.
Different Sources of Generating Business Funding for a Business
For generating investment, there are many small business funding resources that can be availed by businesses. These loans vary according to nature, scale and scope of businesses depending on small and large-scale enterprises.
Financial Resources for Small Businesses
Angel Investors
Angel investing is done by influencers or a group of investors who are willing to invest in potential business. Apart from offering finance to small businesses, they also provide guidance and other related consultancy services to them. This financial aid can facilitate management of working capital, maintain the balance between operating expenses and liquid cash and paying off various bills.
Cloud Funding
As the name suggests, cloud funding is an online small business funding resource. The influencers and investors form groups that allow the new and potential small businesses and startups to pitch their ideas to them. If the investors like a business idea and see potential in the future – they would invest in that business and provide the required funds.
Crowdfunding
Crowdfunding is another Internet-based resource of providing finance which comprises of a group of investors. A little different from Cloud funding, crowdfunding helps different owners of small businesses in seeking a suitable potential investor for them. The members in crowdfunding help the businesses research about their investors through different online platforms – based on either debt or equity. Some of these websites also give out rewards when the businesses approach them for investing. Crowdfunding is an excellent tool to choose from many investors, instead of reaching out to only one investor.
Partnership and Ventures
Getting finance from a partner is a great alternative to generate the required capital for a small business. Resources of a partner firm are generally in line with the resources of another firm in partnership with it. Whereas, venture capital is the finance provided by the firms for meeting and covering the initial phases of a small business. However, venture capital firms usually have the intention of taking a significant share of a small business firm and make bigger investments comparatively. These firms also provide consultation and mentorship for helping them evaluate and analyze their future growth and development. These investments are done against equity and whenever an acquisition happens, venture firm leaves.
Government Schemes
There are many government schemes which provide financial assistance to micro, small and medium enterprises. These schemes are in collaboration with various lending authorities like commercial banks, co-operative banks, NBFCs, Regional Rural Banks, etc. One of them is Pradhan Mantri Mudra Yojana which provides financial assistance to small businesses according to the stage they are in currently. Shishu, Kishore, and Tarun are the three stages which comprise of different amounts of loan. Loans up to Rs. 50000 can be availed under Shishu scheme, Kishore scheme can be availed between Rs. 50000 to 5 Lakhs and under Tarun, businesses can avail an amount between 5 Lakhs and 10 Lakhs. These loans are unsecured and the loan amount can be utilized for purchasing vehicles or to raise working capital.
Bank Loans
Bank loans can be availed by small businesses that have a good credit history and are sanctioned by a bank against collateral. Small businesses can choose from these loans depending on their needs for either short durations or longer ones.
Business Loans for Both Large- and Small-scale Businesses
There are many business loans from various banks which can be availed by both small and large-scale businesses:
1. Working Capital Loans
Businesses can avail these loans for meeting short-term needs, paying operating expenses, maintaining liquidity of cash and increasing their capital. Shortage of cash can be met by this type of loan which can be repaid as you receive payments. Some lenders offer these loans at no prepayment charges.
Read: What is the eligibility criteria for Working Capital Loans?
2. Corporate and Term Loans
These loans are sanctioned for long-term needs to cover capital expenses and maintaining finance for business. They have a fixed time-period and their rates of interest depend on the credit history of a business. These loans are generally offered against collateral but lenders can also issue them without any security if the credit history is good.
3. Equipment Loans
Equipment loans are primarily for businesses that are involved in manufacturing. These loans are specially designed for buying important machinery and plant ranging up to 25 Crore. Some banks also offer these loans for an amount up to 100 Crore. The rates of interest of equipment loans are comparatively low and the equipment itself serves as collateral against these loans.
4. Invoice Loans
Invoice loans are of smaller amounts and serve as an alternative for raising required working capital. Often, there is a huge gap between the delivery of essential inventory and getting paid by the clients as per the invoice. The gap can be filled by availing an Invoice Loan which is offered by banks at a certain percentage of the total amount of the invoices. The remaining amount is due after the payment of the invoice is done by the client. While paying that amount, a minimal processing fee is charged and interest is deducted from that amount.
