A large number of businesses fail primarily due to lack of funds. The journey of converting an idea into a profitable business requires capital. Therefore, most entrepreneurs are constantly trying to find ways to raise money for their businesses.
The fund requirement may vary according to the nature of the business. However, here are three ways that are beneficial in raising the required funds.
- Bank loans
Most owners consider banks when they wish to avail of a loan for business. Banks offer working capital loans. Working capital is the amount that is needed to smoothly run the regular business operations. The loan amount for meeting these expenses depends on the outstanding debtors’ balance and inventory. Bank funding requires entrepreneurs to submit a detailed business plan along with a project report and valuation. Based on this information, the bank may sanction an SME loan for the business.
- Other institutions Qualifying for a bank loan is difficult for small businesses. Another option available for such entrepreneurs is microfinance from institutions. Non-banking financial companies (NBFCs) and other microfinance companies provide secured loans like loan against property (LAP). These prove to be especially useful to business owners who want to borrow large amounts. Furthermore, such institutions offer other SME financing to business owners who are unable to tap regular bank loans.
- Unsecured business loans
Firms with good credit history may opt for unsecured loans. Since the lenders assume greater risk due to no collateral, the unsecured business loan interest rate is high. Such loans are sanctioned on the basis of capital, conditions, character, collateral, and capacity of the borrowers. These factors help lenders determine the willingness and capability of the entrepreneurs to repay the loan. Several financial institutions like Capital First provide business loans without any collateral for businesses that require quick funds to purchase raw materials, machinery, and other such things. Unlike banks, they take into consideration only cash flow of business instead of profit of company.
Entrepreneurs have several options to raise capital finance. However, understanding the pros and cons of each available choice before making a decision is important to sustain the business in the long run.