Funding options for Indian SMEs

Funding options for Indian SMEs

Finance & Accounting

GlobalLinker Staff

GlobalLinker Staff

258 week ago — 7 min read

Small and medium enterprises have big aspirations to grow and scale their business. However one dark cloud that often overshadows the progress of SMEs is 'funding'. Several businesses fail within the first five years of existence and the most prominent reason behind this is lack of finance. Money is the ‘blood’ that keeps the ‘body’ of a business running.

Depending on the nature and type of your enterprise, you may decide to raise funds to support or expand your business and here are some funding options for SMEs that you should be aware of:

1. Bootstrapping your startup

Have you ever heard of the phrase, “pull yourself up by your bootstrap”?

Well, this means supporting yourself without any external help and the same applies to your business as well. When you are just starting off, self-funding your business is a good idea because very few organisations would invest without a proof of concept.

You can either use your savings or ask for loan from family and friends. This also gives you flexibility in payments and keeps you focused on your business without the need to get distracted with compliances. 

2. Crowdfunding

As the term denotes, crowdfunding is raising small amounts of capital from multiple individuals/investors to help finance a new business endeavor. The business projects could be related to music, film or a book publication or it could be anything related to public interest. This method of raising funds has gained a lot of popularity in the last few years. There are various crowdfunding platforms and you can even make use of social media to raise funds. The owner usually puts up a detailed business plan, stating his goals, predicted profits, the amount of fund he needs and for what reasons. Various types of crowdfunding available in India are:

  • Charity based crowdfunding- This type of crowdfunding is more like a donation. This type of funding is especially for social causes.
  • Reward based crowdfunding- In this type of funding; investors who donate money for a cause are given a small return in favour of their contribution.
  • Debt based crowdfunding- In this type of crowdfunding; a contribution is raised in return for interest.
  • Pre-order crowdfunding- In this type of crowdfunding, an investor contributes money knowing that h/she will get a product/service later. It’s like pre-purchasing a product.

Crowdfunding is a like a two-in-one tool that helps an entrepreneur. You get to know if people would be interested in your products (that’s market research done right there!) and it’s also a great medium to advertise your products. Following are some of the popular crowdfunding websites in India:

Also read: 6 tips to improve the financial health of your business

3. Business incubators

Incubators and Accelerators are cropping up in every city in India. These are centers that provide the requisite environment for a startup to grow and expand. In addition to providing basic amenities like an office space, high speed internet connection and mentorship programmes, incubators and accelerators also assist startups with funding their business.

4. Peer-to-peer lending

In peer-to-peer lending, investors are directly connected to verified borrowers who seek unsecured personal loans. The return for such an investment is always higher. There are various P2P lending platforms where borrowers register themselves and investors can check and invest accordingly.

5. Loans form NBFCs

NBFC stands for Non-Banking Finance Companies. These financial institutions provide all banking services but don’t possess a banking license. Hence, they are not authorised to take traditional deposits or readily available funds, for example as in savings account.  A good credit score and a simple loan application is enough to get a loan sanctioned. Some NBFCs even provide overdraft facility with pre-approved loan limit which you can use as and when you desire.

5. Government loans

There are so many government loans you can choose from to arrange funding for your business. The recently recapped PSB business loans in 59 minutes allows you apply for a loan and get it approved within 59 minutes. The Pradhan Mantri Mudra Yojna was established to allow all non-corporate business segments of to India apply for a loan. A loan requirement of up to INR 10 lakhs can be fulfilled through this loan. Different states have also come up with different schemes like iStart by the state of Rajasthan, Maharashtra Centre for Entrepreneurship Development etc.

Also read: 8 business loans and schemes every woman entrepreneur should know about

7. Angel investors

Angel investors are people who have a high net worth and are highly interested in investing in startups. They also work in groups to analyse the potential of a business before investing in one. They are usually the early investors in the business and also support entrepreneurs in perfecting their services / product. They invest against equity and business owner need to part with the ownership of the company to get angel investment. Angel investors are also influencers to promote the business in which they invest.

8. Venture capitalists

Venture capitalists are investors who analyse a business for its growth potential and then accordingly invest in them in exchange of an equity stake. They also provide mentorship and guidance to the owner to successfully grow their business.

There are a few pitfalls of generating funds from venture capitalists.  They usually invest in small companies that are willing to expand but unfortunately don’t have access to equity markets. Hence their repayment window is only three to four years. Venture capitalists take the risk because once a company tastes success; they can earn a massive return on their investment.

Do let me know in the comments section below if you found this article useful.

Also read: Need a loan? Government schemes for MSMEs in India

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