How Small Businesses Can Use Business Funding for Raising Capital?

Starting, expanding, or investing in a business comes with its own set of opportunities, risks, and obstacles. Small businesses have a huge concern about gathering enough capital for the smooth operations of their businesses. The initial phase of any business is crucial and for it to get going and gain that momentum in the market some quick business funding is required.

The interest rates on these loans depend on various factors like the type of lending authority, the type of business, credit rating, market trends, and the amount of loan a business is applying for. These loans range from short-term to long-term financing and can be renewed after a period, if the business is able to pay the amount within the specified time limit. Here is a list of funding options for small businesses.

Funding options for Small Businesses

1. Angel Investing

Angel investors are the influencers who want to invest in a business, which they feel, has the potential to be profitable in the future. However, before approaching an angel investor, you must ensure that you have equipped yourself with a strong business plan. These investors are also forming investor groups to make their research on small businesses more resourceful.

2. Working Capital Loan

These loans are availed by small businesses to meet the short-term needs of liquid cash. When there is a dearth of cash required for daily operations, a working capital loan can be hugely resourceful. Business funding is granted for half to one year and interest rates range from anywhere between 12%-16% p.a. depending on the assessment of credit risk of a business.

3. Term Loan

Term loans are long-term loans applied by a business when investors like a pitch of a business that approached them; they would be willing to finance that idea for credit to meet the capital expenditures of a business and are offered the amount in full. Small business financing has a fixed duration with a lower rate of interest and depends on a business’s credit profile. Generally, these are secured by collateral but lenders can also offer them unsecured. They can be anywhere between 15 to 20 years with a fixed or variable rate of interest.

4. Equipment and Invoice Loans

Equipment loans are especially for a business dealing in manufacturing processes. Banks offer specialized small business funding for the purchase of essential and costly equipment and can range up to 25 Crore, however, some banks also offer up to 100 Crore. The duration of these loans ranges up to 4 to 5 years with a lower interest rate with equipment taken as collateral along with some additional security.

Invoice loans are usually offered as a tool 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 becomes due when an invoice is paid fully. A small amount of processing fee and a comparatively lower interest is deducted.

5. Cloud Funding and Crowdfunding

Cloud funding is a way of financing a business through the internet by a number of investor groups allowing you to pitch your ideas. Crowdfunding is a group of small business financing individuals that help business ideas in reaching out to various prospective investors through different platforms. These investments can be either debt or equity basis. Some crowdfunding websites also offer rewards in exchange for investments. Crowdfunding gives an opportunity of reaching out to a pool of investors, instead of seeking one big investor.

6. Partners and Venture Capital (VC)

Strategic partners for a business can prove to be a great source of raising capital as they align their resources for helping another business. These partners have the option to become an employee of the business. VCs, on the other hand, are the firms that provide small business funding for the initial stages of a business. However, they are seeking comparatively larger investments and taking a controlling part of the company. These firms usually invest against the equity and make their exit when there is an acquisition. They also provide mentoring services and evaluate a business for its sustainability.

7. Government Schemes and Bank Loans

Pradhan Mantri Mudra Yojana is a scheme for providing finances to MSME (Micro, Small, and Medium Enterprise). These loans are provided by commercial banks, cooperative banks, MFIs, NBFCs, RRBs, etc. The loans in this scheme are divided according to the different developmental stages of business – Shishu, Kishore, and Tarun. Shishu stage offers loans up to Rs. 50000, while Kishore and Tarun range from Rs. 50000 to 5 Lakhs and 5 Lakh to 10 Lakhs, respectively. These loans can be availed for a vehicle or raising working capital needs, plant, equipment, and machinery and don’t require any collateral security.

Bank loans are the most common option that offers loans to small businesses with a good record and collateral. You can choose bank loans for short and long-term durations as per your needs.

More Information:

Compare Business Loan Interest Rate with All Banks

Small Business Loan Scheme

Business Ideas You Can Start Online

What are the documents required for Business loans?