Financing is one of the critical milestones in starting or expanding a small business. Whether it is a new start or business expansion, adequate capital is pretty much what you need. Individuals with entrepreneurial minds often look for innovative ways of fundraising for small businesses. This informative piece outlines seven ways that you can rely on to raise funds for your small business. Let’s get started.

1. Loans from Banks and NBFCs

Loans have always been a common strategy for getting funds. For small enterprises, many loans are available, banks and NBFCs being two such options. Let us take a close look at the benefits of obtaining business loans from reputed financial institutions like Shriram Finance.

Benefits:

• Structured Repayment: Most loan agreements incorporate a scheduled repayment clause, making it easier for businesses to manage their finance strategically.
• Variety of Loans: Apart from the conventional types of loans, banks and NBFCs also provide clients with specialised loans to look after the particular needs of entrepreneurs.
• Interest Rates and Tenure: Depending on your business and credit history, you might get attractive low interest rates, and flexible repayment options.

2. Angel Investors

Angel investors may be described as affluent individuals who invest in emerging enterprises or small firms in exchange for equity ownership. Compared to conventional lending institutions, they are usually ready to take risks and sometimes provide their clients with guidance and assistance.

Benefits:

• Negotiation: There is more room for negotiation with angel investors, and their engagement is less formal than venture capitalists.
• Field Knowledge and Connections: In addition to financial support, angel investors usually provide business know-how and connections that further enhance your company.
• Financial Losses: As opposed to loans, this form of investing does not put unnecessary financial pressure on your enterprise as there is no obligation for the return of the capital. However, you must note that the investor does expect a return on their investment in the form of equity.

3. Venture Capitalists

Venture capital funding is similar to angel investing but on a far larger scale. A venture capitalist is an organisation that pools investment funds and could provide the business with much-needed capital in return for equity and eventual exit, most probably through an IPO or acquisition. This funding method can be a real game-changer for a business with high-growth potential.

Benefits:

• Large Amounts of Funds: Venture capital can provide large amounts, usually much more than a bank or an angel investor.
• Strategic Guidance: Venture capitalists remain involved in the business, usually providing strategic guidance and tapping into their deep networks.
• Accelerated Growth: Companies grow much faster with venture capital funding than with organic growth alone.

4. Peer-to-Peer Lending Platforms

Peer-to-peer (P2P) lending refers to obtaining money borrowed directly through an online site and bypassing the function of conventional financial institutions as a connecting agent between business owners and lending institutions.

Benefits:

• Less Borrowing Costs: P2P lending can be the cheapest source of finance for small businesses because of low interest rates.
• Fast Process: These institutions have short approval time frames and support quick disbursal of funds.
• No Collateral: Most P2P lending platforms offer unsecured loans to business owners without providing security assets.

5. Crowdfunding

Crowdfunding is a way of small business funding by aggregating small amounts from multiple individuals. The usual forum for soliciting these funds is through online platforms. This model is often popular with startups with innovative products or ideas that appeal to a wider audience.

Benefits:

• No Repayment or Equity Loss: In reward-based crowdfunding, contributors are promised perks, such as early product access, instead of equity or repayment.
• Market Validation: By conducting a crowdfunding campaign, you get an opportunity to validate the market interest for your product before its actual release into the market.
• Branding: Crowdfunding cultivates a devoted group of early adopters who might endorse your brand in the future.

6. Government Initiatives and Grants

Both central and state governments in India have initiated schemes to aid small businesses.

Benefits:

• No Repayment: In contrast to loans, small business grants do not need repayment, making them one of the most preferred modes of financing.
• Low Competition in Niche Sectors: There could be fewer applications for start-up business grants in certain sectors. Hence, your chances of being funded are higher.
• Access to Resources: Some resources, such as training and mentorship, are provided through government programs.

7. Revenue-Based Financing

Revenue-based financing (RBF) is an innovation in financing in which, instead of seeking equity, entrepreneurs provide their investors with a specific percentage of their expected future income or revenue. It caters to the needs of businesses with regular revenue streams that may want to avoid raising debt or diluting their ownership.

Benefits:

• No Equity Dilution: No need to share the ownership of your company or raise funds from outside angel investors or venture capitalists.
• Flexible Repayment: The repayment rates can be adjusted if your business generates less revenue during a certain period.
• Fast and Simple: RBF can be obtained more quickly than conventional loans, and there is no need for assets.

Conclusion

There are undoubtedly numerous avenues for fundraising for small businesses. From traditional bank loans to innovative models like revenue-based financing and crowdfunding, the best choice depends on your specific needs, growth stage, and risk tolerance.

It's essential to conduct thorough research, understand the pros and cons of each option, and build a strong business plan to attract potential investors. By carefully considering your options and developing a well-thought-out fundraising strategy, you can increase your chances of securing the necessary capital to fuel your business's growth.

FAQs

1. What are the 3 ways that I can get the money to start or expand a business?

Three effective ways to finance a business are through a business loan, angel investor funding, and crowdfunding.

2. What is the simplest method of raising money for a small business?

Crowdfunding is one of the simplest methods of raising money, especially for new venture businesses with a product or service that can attract public interest.

3. Are there any legal regulations to consider when fundraising for small businesses in India?

Yes, there are several legal regulations to consider when fundraising in India. Make sure you get a clear idea of the compliance rules and regulations before taking the final call.

4. Can I opt for microloans while raising funds for my startup?

Yes, microloans are also potential sources of funding for small businesses and startups. However, you need to go through the rules, clauses, and eligibility factors before making the final call.