Whether you are starting a new business or expanding an existing business, both come with several opportunities, hurdles, and even risks. Small businesses often face the problem of gathering sufficient capital for carrying out smooth operations of the business.
The initial setting-up phase of any business is very important and for it to attain growth in the market, there is often the need for quick business funding. The interest rates on business loans may vary depending on various factors like the type of bank or lending institution, business category, credit rating, economic situations and even the amount of loan being sought.
Business loans often range from short-term to long-term and these can be renewed if the business has repaid the amount as per the agreed conditions and specified time limit. For businesses looking to raise easy capital, here is a list of the best funding options available:
- Angel Investing
Angel investors invest in businesses that, according to them, have the potential to grow and be profitable in the future. Before approaching an angel investor for a business loan, you must ensure that you have a strong business plan. This is because they are often well-informed and have investor groups for conducting detailed research on small businesses.
- Working Capital Loan
Working capital loans are ideal for small businesses especially in meeting short-term liquid cash needs. When a business faces a cash crunch required for day-to-day operations, a working capital loan can come in handy. This type of funding is often granted for half-year to one year and interest rates can range anywhere between 12%-16%. This depends on the credit risk assessment of a business.
- Term Loan
When investors like a business idea; they may be willing to finance the same to meet the capital expenditure needs of the business. Small business financing often comes with a fixed duration and a lower rate of interest. This could depend on the business’s credit profile. Check your business health within a few minutes on CreditMantri to get a clear picture of where you stand.
Term loans are mostly secured through collateral but some lenders may offer them without collateral and therefore the loan could be unsecured.
- Equipment and Invoice Loans
Equipment loans are available for businesses that deal with manufacturing processes. Banks provide specialized small business funding for the sourcing of essential and expensive equipment. These loans can be up to Rs. 25 crores, however, some lending institutions may also offer up to Rs. 100 crores depending on business requirement. The loan duration for these is usually between 4 to 5 years and these come with a lower interest rate. The equipment is generally taken as collateral combined with additional security.
- Cloud Funding and Crowdfunding
Cloud funding is a new-age way of business financing which involves raising capital through the internet. Several investor groups are pitched business ideas that can then be funded. Crowdfunding is a group of business financers who help business ideas in reaching the right investors through various platforms. These can either be in the form of debt or equity. Some crowdfunding websites may also have rewards for investments. Crowdfunding helps businesses to reach out to a pool of investors, instead of sourcing finance from a single investor.
- Partners and Venture Capital (VC)
Strategic partners can prove to be a good source for raising capital for a business. This is because they can easily align their resources for business growth. These partners may also opt to become an employee/partner for the company being funded. Venture capitalists offer small business funding for financially helping the business in the initial stages. However, they often target larger investments and prefer to take partial control of the company. These firms invest for an equity stake and would generally exit the company post-acquisition. They also offer mentoring services and constantly evaluate business sustainability.
- Government Schemes and Bank Loans
Pradhan Mantri Mudra Yojana is a government scheme that provides finances to MSME (Micro, Small and Medium Enterprise). These are offered by commercial banks, co-operative banks, MFIs, NBFCs, RRBs, etc. Under this scheme, loans are categorised according to the different stages of development of the business – Shishu, Kishore, and Tarun.
- Shishu stage offers loans up to Rs. 50,000
- Kishore loans range from Rs. 50,000 to Rs. 5 Lakhs
- Tarun loans are anywhere between Rs. 5 Lakhs to 10 Lakhs
These loans can be sought for purchasing a vehicle or raising working capital funds, purchase of plant, equipment and machinery. These loans don’t require any collateral security.
Capital is very important for any business which aims to make the most of the existing and upcoming opportunities. Even if funds are raised through personal finances in the initial stages, outside funding is essential for long term sustainability. Small businesses with a good record can easily source bank loans by offering some form of collateral. Businesses can also choose bank loans as per the duration of their requirement.