Business loans or business funding for raising capital is needed to get the business up and running. One of the reasons why this is so important for small businesses is that the capital to be raised needs to fund even the day to day expenses at times. This makes small businesses vulnerable to uncertainties because of which funding is necessary. To tackle these vulnerabilities, capital is needed for both small and big businesses.
How important is it for small businesses to raise capital?
Small business, also go by the term MSMEs (micro, small and medium enterprises) need to raise capital at various stages of business. These businesses have to conduct day to day operations which require initial capital. This initial capital is generally raised in the form of business loan for which a business plan, vision, idea etc is to be submitted. It is important to take the business off the ground which at times can require more than estimated funds. Hence the manner and sources of raising funds is also diversified.
What are the various sources of raising capital for small businesses?
Any business comes with its own set of opportunities and obstacles. In the initial phase itself, the funding is required in case of small businesses. Some of the ways in which small businesses can use business funding for raising capital are mentioned below:-
- Crowdfunding- When a bunch of people have the same vision and seek similar opportunities from the business they are funding, it is called crowdfunding. This is the most common type of business funding for raising capital. Seminars and webinars are organised to promote and to sell the business idea to crowdfunding investors. This type of investment allows small businesses to avoid taking a business loan. It is a popular way and it works. Small individual investments from companies, individuals or even charities make up crowdfunding.
Types of crowdfunding:-
- Reward-based crowdfunding- Linked to the specific reward with a project, reward-based crowdfunding is done.
- Securities-based crowdfunding- To invest in private companies in exchange for stocks of the company, securities based crowdfunding is done.
- Human capital crowdfunding- To develop human capital i.e. enhancement of skill for growth, human capital crowdfunding can be done.
- Venture Capital- When a business is in its initial stage, it seeks funding in the form of venture capital. Generally, well off investors make investments in the form of venture capital. Investment banks and some other financial institutions also make investments as venture capital. It is not necessary that the venture capital funds are invested only in the early stages of a startup or a business; in later stages too, venture capital investment can be made. Venture capital generally involves equity stakeholding in the business. One prominent feature of VC funding is the knowledge capital along with the funding capital that the investors bring. Knowledge capital helps in scaling the business and growing it economically. Acquisition of latest technologies and networking are also in the VC package.
- Business Loans- The most common and oft resorted mechanism of raising capital from business funding for small businesses is taking a business loan. To get a business loan, a business plan is to be submitted to the bank or the financing entity. Various components are taken into account while approving a business loan or while calculating the interest rates charged on the business loan provided. Not only a banking entity can provide a business loan; many other financial institutions provide business loans. However, the conditions and the interest rate charged or the recovery period may be different for different lending entities.
- Government Schemes- In the domain of granting business loans, various government schemes have been launched at both the central and the state level. Sector specific loans are available. So if the business falls in a particular sector, loan can be availed under the specified government scheme. The prominent sectors and categories under which business loans are available are agriculture/farmers, startups, micro, small and medium enterprises etc.
- Bootstrapping- When the business invests its own money in the business, it is called bootstrapping. Many wealthy people start their businesses by putting in their wealth in their business startup. It is better than taking a business loan and is a good kickstart to initiate a small business. It is less expensive than most of the investment options as the amount invested is not to be returned to any entity. It however is going to generate revenue for the business it is invested in and thereby help in recovery of the amount invested.
- Angel Investment- When a financial institution or a high networth individual makes an investment in a business in the initial stages, it is called angel investment. This type of investment gives financial backing mostly to small businesses. There is an Indian Angel Investment Network which connects angel investors and entrepreneurs. There are many such platforms available nowadays which perform similar functions. Details about the business, its vision and targets for investment are mentioned on the platform. Business loans are not seeked when angel investment is available.
- Non-Banking Financial Companies- The NBFCs are the financial institutions which do not accept deposits. NBFCs have relaxed lending norms as compared to banks for giving loans to MSMEs (Micro, Small and Medium Enterprises). This makes NBFCs a sought after financial institution for getting loans for small businesses. Small businesses are the engines of growth for India. Credit score is checked to grant loans and a good credit score with the application form is all that is needed to get a loan. The loans granted can go upto Rs. 20 lakhs.
- Grants- Government agencies as well as private foundations give grants to businesses. For startups, this business funding for raising capital is extremely important as startups are generally not eligible for business loans. Grants can be seeked as a business funding mechanism. Factors such as reputation of the owner and the business idea are taken into account while granting funds.
Except for bootstrapping, funding of any kind to raise capital is a type of a business loan. Management of business and business expenditure should be done carefully so that the capital can be utilised judiciously. This will help in reaping profits which can help repay the loan easily. Efficient business accountants should be hired so that account management can be done. This helps in better strategizing the finances of the business. Proper market research to gauge the amount of funds that need to be raised should be done prior to raising capital. It helps with two things- discover the amount of capital that is needed to bootstrap the business and the best mechanism for raising such capital.