Starting and expanding business comes with a set of risks, obstacles, and opportunities. Small business owners generally face huge problems while gathering enough capital and working capital for the smooth functioning of the business. The initial phase is critical for all businesses, be it a small or big. They need to gain momentum in the market and among the competitors and keep it going. But during this time, external funding is required, in terms of a business loan.
The interest rates on the loans for business depend on several factors like the lender, the type of business and its sector, credit score, market trends, and the loan amount availed. The business loan ranges from short-term to long-term loans and can be renewed in terms of a top-up loan. Notably, a top-up business loan can only be availed if the business owner repays the loan EMI within the specified time.
Let’s now take a look at the several funding options available for small business owners.
Working Capital Loan
A working capital loan is offered to small business owners to help them meet their short-term needs of liquid cash. When a business owner feels there is a dearth of cash for day-to-day operations, a working capital loan is a product for them. It can be hugely resourceful. A business is granted a working capital loan for 1-2 years on the basis of their credit score and creditworthiness.
Angel Investing
Angel investors are essentially investors who want to invest their extra money in a small business with a unique idea. Angel investors look for businesses with great potential and can be profitable in the future. However, it is a must that the business owners should have a strong business plan before approaching an investor angel. Notably, the angel investors these days are forming groups to research on the small businesses which are worth investing.
Term Loan
Term loans are generally long-term, which are applied to boost the capital of the business and expand it. The capital expenditures can be met in full with a term loan. Notably, small business financing generally comes with a fixed duration coupled with the most competitive interest rates and easy to meet eligibility criteria. Generally, term loans require security as they are long term. However, there are few lenders who offer unsecured business loan as well. A term loan can range anywhere between 15 and 20 years with a variable or fixed rate of interest.
Equipment/ Machinery Loan
Equipment or machinery loans are businesses which are facing difficulty in updating or buying new machinery. Manufacturing units in India generally avail these loans. This type of loan generally does not require collateral hypothecation as the machinery purchased with the loan acts as a security. However, some lenders may also take additional security if the loan amount is higher than the value of the machinery/equipment.
Many lenders offer loans to buy machinery that may range up to Rs. 25 crores. However, some lenders also offer loans of up to Rs. 100 crores. The duration of the machinery loans ranges between 1 year and 5 years. Notably, before disbursing the loan amount, a small amount in the name of processing fee and file charges are deducted from the sanctioned loan amount.
Crowdfunding
Crowdfunding is an excellent way of borrowing money for the business. In this, a group of investors lend money to the business owner if they like the business plan and the pitch of the business idea.
Crowd funders form a small group for small business lending that helps small businesses with an excellent idea to grow and expand their business. In return, the crowd funders get a share in the business. They make investment either debt or equity basis. There are several crowdfunding websites as well that offer rewards in exchange investment. Crowdfunding provides an opportunity for the business owners to reach out to a group of investors instead of just one big investor.
Venture Capital
Partners for a small business can be a good source of raising funds as they invest their financial resources for helping small businesses. These partners can be at a managerial position and become an employee of the organisation. On the other hand, a small business owner can also look forward to Venture Capital that provides funds to the business in its initial stage. However, Venture Capitalists look for a controlling part in a company and seek for a larger investment.
Bank and NBFC business loans are the most common way of raising funds for a small business. Loans from NBFCs and online lenders are instant business loan that offer the business owners to start, sustain, and expand their business by meeting all their financial requirements. Besides, they are offered at a low-interest rate, and there is no need to give equity or a part of the business to avail them.