Money is the lifeblood of every business. Lack of adequate and timely capital can inhibit growth. Today, it has become imperative that new-age entrepreneurs and owners of micro, small and medium enterprises (MSMEs) look beyond traditional sources of business finance.
Many small businesses are denied credit for the lack of a collateral asset or poor credit score.
The tedious and time-consuming processes used by traditional banks add to the woes of entrepreneurs looking for loans.
Looking at the scenario objectively, the demand for financing in the Indian MSME sector is estimated at Rs 87.7 trillion, of which Rs 69.3 trillion is debt and the balance Rs 18.4 trillion is equity demand. It is virtually impossible for the formal finance sector to service the needs of approximately 56 million such enterprises across various industries. Hence, it becomes critical for entrepreneurs to explore alternative methods of financing.
6 methods of financing your small business
If you are a part of a fledgling business and looking to raise capital, here are six alternative sources of business finance you can explore.
- Angel investors.
- Venture capitalists.
- Business plan competitions.
- P2P lending .
- Government schemes.
Scan the list below, then read more about any funding source that interests you.
In this internet age, crowdfunding is a great way to get a number of individuals interested in your idea, product or service and raise money from them.
This method uses the power of the crowd to invest small amounts, and bets on mass appeal.
Originally, crowdfunding was used by nonprofits to gather donations, very similar to ‘chanda’ collected in India during festivals. Today, online crowdfunding platforms generate financial backing for a variety of startups and projects.
There are multiple types of crowdfunding that MSMEs can use:
- Equity-based crowdfunding is when the investor gets a small percentage of share of the business in exchange of the investment pumped in.
- Reward-based crowdfunding involves individuals investing small amounts of money in exchange for a reward such as free service or a prototype product.
- Debt-based crowdfunding is when investors put in money with the understanding that it will be repaid with interest.
2. Angel investors
Angel investing is best suited for startups and young businesses that have a great idea or product, but need a launch pad. Angel investors are also popularly known as seed investors or informal investors.
These investors help businesses get off the ground, while mentoring entrepreneurs and helping them learn the ropes.
There are thousands of such investors in India, mostly affluent businessmen or corporate leaders. They usually invest in niche areas.
In addition to the moolah, it is critical to find an investor that has experience and interest in your specific industry. Not only will their mentorship be valuable, their huge network will also prove to be a bonus to help expand your business.
The best way to meet angel investors is at networking events and pitch sessions.
3. Venture capitalists
Venture Capitalists (VCs) come in at a later stage of business growth. They provide capital to firms exhibiting high growth potential in exchange of stake in the company.
To get a VC interested in your business is not an easy task. You will need to have:
- A strong and sustainable business model,
- Proven sales records
- Loyal customers
They also look for a strong management team before they invest.
Ensure you partner with a VC who understands your business and is aligned with your growth, as you will be giving them a say in your business. While for most businesses, getting VC funding is the ultimate goal, the focus should be on partnering with the right VC firm.
4. Business plan competitions
You may not have the opportunity to pitch your idea on Shark Tank, but keeping an eye out for business competitions near you. These can offer a small window of opportunity to get seen and heard by the right people.
Many B-schools and savvy corporates organise business plan competitions and hackathons that attract the brightest minds across the country.
The finalists get to present their business ideas to some of the biggest VCs in India. A winning pitch can get you a considerable cash prize, access to an accelerator programme and equity participation from interested investors.
5. P2P lending
The new-age lending model called Peer-to-Peer platforms (P2P) allows retail investors to lend money to peers or small businesses via a fintech company’s digital platform.
Applicants are vetted by the fintech company or intermediary based on complex algorithms that assess the credit-worthiness of the proposed borrowers over various risk factors.
Based on the risk profile, interest obligation on P2P loans can start as low as 12% up to as much as 35%. The cost to the borrower is directly proportionate to the risk involved for the lender.
An investor has the option of fulfilling partial or complete requirements of a business. Most fintech companies allow only a partial investment in a single requisition, with multiple investors contributing small amounts to a single business.
P2P loans are a good option for stop-gap and working capital requirements with speedy approvals and disbursals.
6. Government schemes
The Indian Government is betting big on the entrepreneurial spirit of India and doing its bit to promote and support MSMEs. You could avail from various methods of financing such as:
- The Credit Guarantee Scheme provides small businesses and first-generation entrepreneurs with collateral-free credit.
- Stand Up India aims to empower women and citizens from socially deprived classes to set up greenfield enterprises with loans.
- Sole proprietors, small industries and artisans can avail of loans under the Pradhan Mantri MUDRA Yojana.
Most of these loans are available at extremely competitive rates, usually much cheaper than personal loans with flexible repayment tenures ranging from five to 11 years. Get the details here.
Sources of business finance
A plethora of funding options available from the crowdfunding, VCs, digital platforms and even retail investors are making it easier for businesses to start up and thrive today. The questions you need to ask yourself are:
- How prepared are you to take advantage of the opportunities?
- Which is the right source of business finance for you?
- Do you have a robust business plan and a clear roadmap to drive growth?
Once you have a clear vision, the above methods of financing can turn your entrepreneurial dream into reality.