Starting, expanding, and investing in a business offers opportunities, risks, and hurdles. Raising funds for smooth business operations is a huge concern for small businesses. The first phase of any business introduced newly in the market is very important, and if a business must gain momentum, it requires quick business loans. Loans are available at different interest rates.
These rates vary according to the lending authority, business type, credit rating, market trends, and the business loan amount. These business loans may be short-term or long-term and are renewable after a specific duration if a business repays the loan within the time limit specified.
Here are a few creative ways to raise funds for small businesses:
1. Angel Investing
Investors who want to invest in a business they believe has the potential to become profitable are called angel investors. You must ensure you have a strong business plan before approaching them. They also form various investor groups to research small businesses that can succeed.
2. Working Capital Loan
Working capital loans are business loans available to small businesses to meet the short-term requirements of liquid cash. Such loans are very useful when there is a cash deficit that affects daily operations. Business loans are granted for 6 months to one year. The interest rates may be between 12% and 16%. This depends on the credit risk assessment of a business.
3. Term Loan
These are long-term business loans extended to businesses if investors like a pitch delivered by them. Investors are willing to fund the idea to carry it forward for credit and meet their capital expenditure. They are offered the full amount. Small business loans have a fixed period with lower interest rates, depending on a business’ credit profile. These are secured by collateral generally, but lenders can excuse it. The duration is between 15 and 20 years with fixed or variable interest rates.
4. Equipment and Invoice Loans
Equipment loans are business loans provided to businesses running manufacturing processes. Banks offer businesses specialized business loans to purchase important and expensive equipment that costs up to Rs. 25 crores. Some banks even offer up to Rs. 100 crores. The duration is between 4 and 5 years with low-interest rates. The equipment is considered the collateral, along with some additional security.
Invoice loans are offered as a vital tool for raising funds, as there is a time lag in raising an invoice and receiving the payment due against it. Banks offer such business loans at 80% of the invoice amount, and the balance is due when the invoice is fully paid. Processing fees, usually a small amount, along with a low-interest rate, are deducted in such cases.
5. Cloud Funding and Crowdfunding
Cloud funding finances business through the internet by investor groups allowing you to pitch your ideas. Crowdfunding is a group of small business financers who help businesses by connecting with various investors across different platforms. These investments may be debt- or equity-based. Some crowdfunding sites offer rewards to investors. It allows small businesses to reach out to a group of investors instead of a single large investor.
6. Partners and Venture Capital
Strategic partners are a great way to raise funds for a business. This is because they align their resources to help another business. They can also work as an employee in the business they fund. Venture capitals are firms that offer small business loans for the first few phases of a business. They usually seek larger investments and take control of the company. They invest against equity and leave when there is an acquisition. They provide mentoring services and evaluate the business for sustainability.
7. Credit Cards can be used to raise funds for a business.
Credit cards may be used by startup owners to secure financing to facilitate the seamless functioning of their firm. It is one of the simplest ways for small enterprises to obtain capital. All that this requires is the knowledge of how to use a credit card. If you don't pay your credit card bills on time, you'll have to pay more interest in addition to the principal amount. A line of credit loan is another name for this type of funding.
8. Government Funding
These are loans allocated by the government to support new technology and causes such as education, medicine, and social work. Some schemes are:
- MSME Loan in 59 Minutes
- Pradhan Mantri MUDRA Yojana
- Credit Guarantee Fund Scheme for Micro and Small Enterprises
- Credit Linked Capital Subsidy Scheme
9. Microloans
Microloans are useful fundraising options for businesses as they involve shorter payment periods and medium to low-interest rates.
10. Bootstrapping
This option does not require giving up ownership or independence in any form, as businesses can secure resources by mortgaging their assets. It is cheap, and business owners can concentrate on the business entirely. They have the freedom and flexibility to develop their business in ways they consider appropriate. However, the risk of failure is very high, and there might be cash flow problems.
11. Incubator Programs
Incubator programs are created by financial leaders or business investors to give businesses access to the resources required for growth. They help them through more than just finance. They provide mentorship, facilitate network establishment, and impart important entrepreneurship-related training.
12. Friends And Family Loans
Friends and family have a personal interest in the success of their close ones’ business. Therefore, they will be willing to invest. However, this can get tricky. Hence, the advantages and disadvantages must be thoroughly considered before accepting such loans and using them.
Conclusion
Most entrepreneurs require funds to convert their ideas into a good business model. Business loans offered by banks are the most common choice for small businesses with a good credit record and collateral. The ways of raising funds mentioned above can be adopted by small businesses to support daily operations and meet other business needs. They can choose loans offered by banks to meet short-term or long-term needs. Every method of raising finance has its advantages and disadvantages. Hence, businesses must study, investigate, and analyze each method and choose the option that suits them best.
