Five Underrated Small Business Finance Avenues

When an entrepreneur starts to think of running a business, it’s not land, infrastructure or manpower that they need first. It is money, without which no business can even get off the drawing board. Entrepreneurs and small businesses can choose from a range of options to mobilize money required to launch, sustain or grow their operations.

Many people often use their own savings or take money from their friends and family in the initial stage of a business. This is not only the quickest way to start a business but also ensures that the entrepreneur retains full control of the business.

However, most small entrepreneurs don’t have enough savings to grow beyond a certain point. This makes it imperative for small businesses to mobilize capital from external sources.

Common Sources Of Capital

Bank/NBFC Loan:

The most common source of external capital is a loan from a bank, non-banking finance institution (NBFC) or microfinance institutions. Such loans are offered with or without collateral for a fixed period of time at varied levels of interest rates. Typically, NBFCs offer a quicker and easier loan approval process than banks.

Venture Capital:

Another well-known source of funding, especially for new-age startups and small businesses with growth potential, is equity investments by venture capital firms. VC firms are private investment firms that pool money from wealthy individuals and financial institutions, and then invest this money in startups.

Underrated Sources Of Capital

Apart from bank or NBFC loans and VC investment, small businesses can raise capital from several other sources. Here are some uncommon options for moping up relatively smaller amounts.

1) Government Schemes

• Several government agencies help small businesses who need funding. For instance, the Small Industries Development Bank of India, or SIDBI, provides short- and medium-term loans of Rs 2-3 crore to micro, small and medium enterprises for augmenting their working capital or to execute orders.
• Similarly, the Pradhan Mantri MUDRA Yojana helps provide funds for budding entrepreneurs. Under this scheme, Micro Units Development and Refinance Agency Ltd provides refinance support to banks, microfinance institutions and NBFCs for lending to micro units that need a loan of up to Rs 10 lakh.
• The government’s Startup India Seed Fund Scheme 2022 has an outlay of Rs 945 crore to provide funding to startups for proof of concept, prototype development, product trials, market entry, and commercialization. This scheme will support about 3,600 entrepreneurs via 300 incubators in the next four years.

2) Angel Investments

These are equity investments made by wealthy individuals in startups or small businesses, either directly or through an angel network. India has many such groups, including the Indian Angel Network and the Mumbai Angels.

However, angel investors typically invest a much smaller amount than VC firms. This means an entrepreneur will have to tap, and manage, a large number of individual angel investors instead of working with one or two VC firms.

3) Accelerators And Incubators

For businesses at an early stage, there are many accelerators and incubators in India. This option has several advantages. Accelerators and incubators nurture a business and help it grow from scratch by providing the necessary guidance and technological know-how to budding entrepreneurs.

These organizations also help startups connect with mentors, fellow entrepreneurs, and investors. In addition, these organizations often provide a small amount of capital for startups to kick-start their ventures.

4) Crowdfunding

Over the past few years, a number of online crowdfunding platforms have come up, both in India and globally, that allow a startup, an entrepreneur or even non-profit organizations to raise money from a large number of individuals.

Essentially, crowdfunding is a way of mopping up money from people. The money could be a loan, an equity contribution, or a pre-order for a product that the entrepreneur wants to develop and sell.

5) Contests, Events, Pre-Sales

Organizations can arrange contests or events for fundraising. In addition to raising money, contests and events can provide entrepreneurs opportunities either to finetune a product or devise a blueprint for their business.

Product pre-sale refers to startups or entrepreneurs selling their product or service before launching it. This could be an effective option for raising finance. Moreover, this could also give the startup a more accurate idea of the demand for its product or service before it commits more resources.

Conclusion

If you’re looking for funds to kick-start your business or expand your venture, you have multiple options for doing so. Choosing an option will depend upon a number of factors.

You must first decide whether you want to use your savings or sell any assets to meet your fund requirements. Other factors that you should consider are the amount you want to raise, your projected cash flows and expenses, and whether you prefer debt or equity capital.

A loan from a bank or an NBFC like IIFL Finance is an easy and hassle-free option. You can also take several unconventional routes. So, consider every option to finance your business before you make a decision.