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What are the Sources of Funding for Businesses in India?
Whether managing an existing business, or planning to expand your company, securing working capital is a common challenge. As an entrepreneur, the key to the success of your venture is ensuring a steady financial flow. The blog covers the different sources of finance for businesses so you can easily arrange adequate funds to successfully run your company.
There are some good sources of funding one can turn to for their business:
Every business needs working capital. Even if your business generates a regular flow of income, you can turn to a bank or NBFC for funds. There are various types of Business Loans in India one can choose from – Working Capital Loans, Overdrafts, Small Business Loans, Secured Loans and Unsecured loans are some of them.
Venture capitalists are a set of wealthy individuals who provide capital to businesses exhibiting high growth potential in exchange for a stake in the business. They will want an equity stake in the company in return for their investments. You may approach a venture capitalist who may have a fair idea and expertise in your area of business to provide you with funds.
Angel investors are private individuals or wealthy networks who support ventures during their initial growth. They offer financial backing to small businesses in exchange for ownership equity. Unlike venture capitalists, angel investors use their personal funds, so they do not have to repay the invested money. However, this becomes a challenge for entrepreneurs as angel investors often seek 10% to 50% of the company's equity in return for funding.
One of the sources for business could be crowdfunding which is a great way to get varied individuals interested in your business idea. Your peers and other individuals who believe in your great idea can fund through crowdfunding platforms or social media websites.
Different types of crowdfunding that MSMEs can use:
The Indian Government is actively supporting businesses , Micro, Small, and Medium Enterprises (MSMEs), women-run businesses, and other ventures through various Guarantee Schemes. Notable options include the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), MUDRA Loan Scheme, Make in India, and Production-Linked Incentive (PLI) Schemes. Banks can provide additional details on these schemes, offering valuable support for businesses.
Self-financing is one of the initial approaches that one can take to fund their own business through their savings, from commercial or residential property, or as gold bonds, even a family inheritance or savings from a previously successful business that can give you a good kick start to your finances.
Peer-to-peer (P2P) is another commonly used source of funding for businesses which allows retail investors to lend money to peers or small businesses. . Here the lenders’ involvement is limited but the rate of interest is high compared to other sources of funding. Peer-to-peer lending is good for stop-gap situations and having working capital requirements with quick approvals and disbursals.
Businesses seek to maximise profits by selling goods or services at a higher price than their production costs. This serves as another major funding source. After earning profits, companies decide how to use the funds, whether to distribute them among shareholders, invest in new projects, or initiate stock repurchases.
Businesses often use trade credit for short-term financing. It is given to customers with a good financial standing. The amount and time of credit depend on factors like the buyer's reputation, the seller's financial position, past payments, and market competition. Different industries and people may have different trade credit terms.
Also read: What Is Trade Credit? - Definition, Formula & it's Benefits
Factoring is a way for businesses to manage their working capital by reducing the size of accounts receivable. For example, if a customer takes a long time to pay an invoice, a business can sell that invoice to a factoring company. The factoring company pays for the invoice or provides a loan, allowing the business to avoid waiting for payment. Additionally, the factoring company may also handle the risk of non-payment by the client.
Leasing allows companies to spread payments over time, avoiding the need for a huge upfront investment. For businesses that heavily rely on expensive assets like machinery, leasing can be a smart choice.
Public deposits cater to both the short and medium-term financial needs of a business. It benefits both depositors, who receive higher interest rates, and organisations, which incur lower costs compared to borrowing from banks. Typically, companies invite public deposits for up to three years, with regulation by the Reserve Bank of India.
Commercial Paper (CP) is an unsecured money market instrument that allows top-rated corporate borrowers, primary dealers, and financial institutions to diversify short-term borrowings. It can be issued for maturities ranging from a minimum of 7 days to a maximum of 12 months, in denominations of ?5 Lakh or their multiples.
Share capital is the money obtained by issuing shares, which are units of a company's capital with nominal values. For instance, a company may issue 1,00,000 shares at ?10 each, totalling to ?10 Lakh. There are two main types of shares: equity shares and preference shares. Money raised from equity shares is termed equity share capital, while money from preference shares is called preference share capital.
Debentures are documents that companies use to acknowledge that they owe money to someone or some entity. It is a way for companies to get long-term funds through borrowing. Typically, these debentures are not backed by specific assets, but they do pay interest and need to be repaid on a set date.
Companies secure debt financing through bank loans or by issuing debt securities like corporate bonds. In debt financing, the issuer borrows funds and commits to repaying the principal and interest according to the specified schedule. A major drawback is an obligation to make timely EMI payments, with the chances of default in case of unavailability of funds.
Companies raise funds by offering shares to the public or through private equity financing. Investors become shareholders by purchasing shares and gaining ownership stake. Unlike debt financing, equity funding does not involve interest payments, but it means sharing profits among all shareholders. However, selling more shares can dilute a company's ownership control over time.
Also Read: Debt Vs. Equity Financing: Which is Best for Small Businesses?
Bootstrapping occurs when an entrepreneur uses personal funds or resources to finance their business idea, maintaining control without incurring debt or sharing ownership with investors. However, it may not be suitable for businesses requiring substantial upfront capital.
In corporate finance, buyouts change a company's ownership structure. Once a company goes private, freeing itself from the regulatory constraints of being public, the primary objective is to enhance its value. The buyout strategy may involve selling non-core assets, refocusing on the company's mission, streamlining processes, refreshing product lines, and replacing current management.
Franchising proves valuable in financing business expansion. It gives initial funds, and continuous revenue, lowers spending, lessens risk, and can establish a self-sustaining growth cycle.
In today's market, there are various sources of finance for businesses. It is essential for you as an entrepreneur to carefully consider your financial needs before choosing the right option. One of the choicest funding options for ventures is availing a Business Loan. Top NBFCs like Poonawalla Fincorp offer a substantial Business Loan amount at attractive interest rates and flexible repayment terms that can fuel your company’s growth.
Convertible debentures, non-convertible debentures, redeemable debentures, and irredeemable debentures are the different types of debentures a company can issue.
When establishing a business, funds can be obtained from various sources such as crowdfunding, angel investors, or venture capital firms. Furthermore, collaboration with an incubator or accelerator is also an option.
Some essential points to consider when choosing a source of finance include current financial strength, financing cost, purpose of financing, risk involvement, creditworthiness, tax benefits, etc.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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