In India, entrepreneurs have option to choose from a wide range of secured and unsecured business loan products. Some of these business financing options are conventional, whereas others are modern and technology-driven. Likewise, the business loan products differ from each other in the category of lending limit, repayment period, rate of interest, and eligibility criteria. But the small business owners can easily avail credit at favourable terms by comparing business loan products provided by various lenders. Also, the small business owners need to understand various sources of small business financing in India.
7 Important Sources of Small Business Financing in India
1) Conventional Banks
The commercial and private banks still dominate the landscape of banking in India. The banks provide business loans to small, medium, and large enterprises. Most banks require borrowers to apply for small business loans in person. Also, the entrepreneurs have to meet strict credit requirements and submit elaborate documentation to avail working capital finance. Many entrepreneurs find it daunting to avail working capital loan from nationalized and private banks in a quick and convenient way. The smarter entrepreneurs even prefer other sources of small business financing to banks.
2) Non-Banking Financial Companies (NBFCs)
Like banks, NBFCs also provide an array of loan products to small businesses. Normally, the NBFCs charge interest at a higher rate on small business loans than banks. But they enable entrepreneurs to avail credit in a quick and convenient way. Many entrepreneurs prefer NBFCs to banks to speed up loan disbursements. Nowadays, many NBFCs even take advantage of financial technologies (fintech) to provide a number of modern and technology-driven loan products. Many entrepreneurs opt for these technology-driven small business funding options to avail credit without using assets as collateral and repay the debt in a more flexible way.
3) Fin-Tech Companies
Within a short span of time, fin-tech companies have completely transformed the small business lending landscape in India. Many fin-tech companies leverage advanced technologies to simplify and speed up small business funding process. In addition to allowing entrepreneurs to choose from a wide range of technology-driven loan products, the fin-tech companies further evaluate creditworthiness of borrowers based on real-time data like monthly sales routed through point-of-sale (POS) terminals. Also, many fin-tech lenders make credit accessible to small business owners who do not meet the strict eligibility criteria set by banks and NBFCs.
4) Venture Capitalists
A small business owner can also avail credit from venture capitalists. Normally, the venture capitalists provide both financial assistance and expert advice to small business owners. But no venture capitalist invests in a small business without evaluating its potential and scalability thoroughly. Hence, many entrepreneurs find it challenging to impress and convince venture capitalists. But venture capitalists, unlike other sources of small business funding, helps entrepreneur to run and grow their business, in addition to providing credit. They even stay invested in the business till it is acquired or goes public.
5) Angel Investors
In India, many angel investors provide capital to small enterprises or start-ups to set up or expand businesses. The informal investors are normally affluent individuals who invest in enterprises from diverse sectors. Some of these angel investors even collaborate with investor networks based on region or industry. Likewise, some angel investors provide credit in exchange for ownership equity, whereas others provide credit in exchange of convertible debt. However, the angel investors invest only in selected and new-age business ventures.
This source of small business funding enables entrepreneurs to avail credit from individual lenders instead of lending institutions. In India, an entrepreneur can avail crowdfunding through a number of crowdfunding or peer-to-peer (P2P) lending platforms. Many small business owners in India nowadays opt for crowdfunding to meet working capital needs without sacrificing equity in business or intellectual property rights. But the entrepreneurs must create an attractive project page and post compelling videos to persuade individual lenders to extend credit.
Unlike these sources, bootstrapping is an internal source of procuring credit for small businesses and start-ups. The option enables entrepreneurs to meet working capital needs by investing his personal funds or borrowing money from friends/family at low interest rates. The funds raised through bootstrapping will help the entrepreneur to meet working capital needs or improve cash flow position quickly without paying interest at high rates. However, a small business owner must not opt for bootstrapping when the working capital needs are too high.
On the whole, an entrepreneur has option to choose from several sources of small business financing. Each small business financing source further allows borrowers to choose from a number of small business loan products. But the entrepreneurs must opt for a source that enables him to avail credit without strict credit requirements and long disbursement process. The small business owners also need to know how to build business credit for small businesses. Likewise, they need to prefer technology-driven loan products to conventional small business needs to repay the debt in a convenient and flexible way.