Contrary to popular belief, the most difficult time for entrepreneurs is not when they start from scratch, but when they need to scale up to another level of growth and development.
When you start a business, you have relatively little to lose, and mistakes are fixable. However, when your business is there for more than a year, things easily get difficult, largely because you need financing options to grow and flourish. While an SME loan is available there for your business, there are some more financing options as well which you can explore.Let’s look at them=
Line of Credit – Often abbreviated as LOC, a line of credit is an arrangement between a bank and a customer that helps in establishing the limit of a maximum loan amount which a borrower can use. The main benefit of LOC is its in-built flexibility, which allows a borrower to avail a certain amount without actually using it. Using a line of credit to fund your business growth would make it easier to manage your cash.
Also called Documentary Credit, it helps you borrow only that amount of funds which you require and thus, gives more control over the interest that you would have to pay. It means, you can borrow as much as you want, within the limit of theloan and you would be paying interest only for that amount which you borrow.
The best part about the line of credit is that its monthly EMIs only consist of the interest component, thus, gives you the flexibility to manage your cash flow easily and repay your principal amount at the end of the tenure.
SME Loan – As stated above, you can avail an SME loan to fund your company’s growing financial needs. If you are looking for significant capital to fund your business needs, SME loan can be a good option which can offer you a loan amount up to Rs 25 crore. You can use the amount to purchase plant & machinery and maintain your inventory.
Even you can use an SME loan to meet seasonal demands or working capital requirements. Further, not only banks but various non-banking financial companies (NBFCs) also offer SME loans without security to meet various business loan requirements. It means, without pledging your asset, you can get a loan on the basis of cash value and expected revenue of your business.
Government Programs – To promote the start-up culture in India, the government created a startup fund in the Union Budget of 2014-15. There are also various government programs through which you can borrow the funds without collateral under the name of the Credit Guarantee Fund Trust for Micro and Small Enterprises. Further, the government is meeting business loan requirements through its program called, MUDRA.
Risk Capital – Venture capitalists or angel investors can offer you capital in exchange for equity in your company. They invest in such projects which are risky but have a bright future both in terms of profits and growth. They also come with secondary incentives like offer mentorship, expertise etc. The money given by angel investors is collateral-free, which means, you don’t require pledging an asset to get finance. As these investors run the risk of losing money if the business fails, therefore, both angel investors and venture capitalist would thoroughly review your business plan before releasing the funds. As your business has celebrated its first ‘birth’ anniversary, you can opt for risk capital to grow your business.
Crowdfunding – The crowdfunding process works interactively, wherein the entrepreneur approaches a layman with his idea, which would include how revenues would be generated and where the amount would be invested. Then the crowd gives their response to the idea in the form of donation or through pre-booking of items. This kind of financing option not only helps in meeting the needs of an entrepreneur but also builds an audience for him who are interested in funding his idea as well as giving a boost to the business in the initial years.
Friends and family – You can also approach your friends and family to raise funds for your business. However, treat this as a formal fundraising option. Pitch your business idea to them as you would have done to an angel investor. Further, make sure that all paperwork and other formalities are completed. Also, send quarterly reports and schedule meetings to brief them on the company’s progress. Here, the trick is to keep your relationship professional only.
Strategic Investors – As you have completed a few years in the industry, large companies for whom your business idea is a related opportunity could also invest in your venture as a strategic partner even if a break-even is not achieved. For instance, if you have a healthcare services platform, it could be a ‘related’ opportunity for a large company who is working in the health domain. A strategic investor can also assist in validating the concept to external investors. It will make it easy to raise funds at later stages.
The way you should raise capital would depend on your business and its goals. All successfully growing entrepreneurs work towards bolstering the cash flow, and they do it by striking a perfect balance between a vast range of capital sources and cash substitutes. Irrespective of the fact that whether you are a later stage startup or a second-generation family venture, a well-drafted and flexible financial plan focusing on scale-up would grow your business.