What Is The Best Way To Finance A Small Business?

Sourcing funds to start or expand a business tends to be a constant challenge for entrepreneurs. Get to know the 6 ways to finance your business easily!

19 Nov,2022 16:59 IST 1382
What Is The Best Way To Finance A Small Business?

Every business needs funding but the one question that every business owner must find a solution to is "How?". There are a wide range of funding options available in the market for business owners and entrepreneurs to suit their requirements.

Each type of funding option has its costs and benefits. So, business owners should carefully analyse what works best for the business. Some of the different funding options for businesses to choose from are as follows:

• Microloans:

Microloans are short-term non-traditional business loans that bring borrowers, lenders and investors on one common platform. In developing countries like India it is common with business owners who do not have access to local financial institutions. It is also ideal for entrepreneurs with no credit history or for businesses that require very small capital. Though microloans require no collateral, the biggest drawback of this type of lending is its end-usage. Microloans restrict the freedom of the business owners to use the loan amount only on what the loan has been taken for.

• Venture Capitalists and Angel Investors:

Often, businesses in their early stages of growth look for venture capital firms or angel investors who are private firms or individuals with money to invest. These investors offer funds in exchange for an ownership share and, sometimes, an active role in the company. It is a fairly popular funding option especially among tech startups.

• Crowdfunding:

Unlike venture capital firms or angel investors, crowd funders do not receive a share of ownership in the business. Neither do they expect a financial return on their money. It is a way of raising money from a group of individuals who have money to invest. In some cases, if a business fails to achieve the funding goal, the pledged finance must be returned to the investors.

• Invoice Financing:

In invoice financing, lenders lend against the unpaid invoices. The lender takes the borrower's outstanding invoices as collateral and offers a loan on a certain percentage of the total monetary value of the invoices.

• Merchant Cash Advance:

It is a financing option for small businesses wherein a cash amount can be borrowed in advance based on the credit or debit card sales of the business. There is no requirement for a collateral but the lender might check the credit history of the applicant to assess the repayment capability of the borrower.
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• MSME Loans:

Micro, Small, and Medium Enterprise (MSME) loans are business loans or credit facilities offered by banks to small and medium enterprises to meet their financial needs. It can be availed by all small business owners, women entrepreneurs, self-employed professionals, startups, sole proprietorship and partnership firms, manufacturing and service-based undertakings of small and medium size. All one has to do is to meet specific eligibility criteria in order to avail of this type of loan.

MSME Loans – The Best Solution

There are a few features of MSME loans that make it the best financial solution for small businesses:

• MSME loans are both secured and unsecured. New businesses or small businesses who barely manage day-to-day operations and do not have any tangible assets to be pledged as collateral can opt for unsecured MSME loans. Nowadays, most banks offer online MSME loans.
• The biggest advantage of the MSME loan is that it can be used for a variety of purposes like meeting working capital needs, expanding business, buying fixed assets, upgrading infrastructure, marketing, etc.
• Since MSME loans are encouraged by the Government of India to boost the small-business economy, these loans carry reduced interest rates. It also depends on the applicant’s profile and business requirements.
• MSME loans require basic documentation. So, these loans can be availed easily. Banks also release the loan amount quickly. Currently, financial institutions offer MSME loans through various schemes like the:
• CGTMSE: Credit Guarantee Fund Trust for Micro and Small Enterprises
• National Small Industries Corporation (NSIC) Subsidy
• PMRY: Prime Minister’s Rozgar Yojana
• Startup India

Conclusion

Every business needs finance. And securing funds on time, especially in a developing country with limited access to financial institutions, can be difficult. With rare exceptions where money comes from the family and friends, most seek for external help in the form of loans to start a business or to keep the operations running.

Securing funds from angel investors can be an alternative for those happy to part with the ownership of the business in exchange for capital. For smaller amounts, microloans can be a good alternative. But for those looking for larger amounts for a longer period, availing an MSME loan is the best way to finance a small business.

Most banks and financial service providers like IIFL Finance offer MSME loans of different kinds. Business owners just need to meet the eligibility criteria to choose from the different MSME loan schemes available at IIFL Finance. IIFL Finance also offers its customers 100% digital loan application services for a hassle-free experience.

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