A new business generally requires some form of business finance to take off from the ground. With the opening up of markets since 1991, the financial services market in India has seen exponential growth in terms of products and services. Nowadays, there are many ways a small business owner can raise capital for his/her enterprise. In today’s post, we are going to review nine such financial vehicles that allow a startup to raise quick business loans.
A line of Credit:
The line of credit is a facility offered by your banking or financial partner, allowing you to withdraw funds as needed up to a limit. So, instead of receiving the full amount as a one-time term loan, you get the funds on a need-to-use basis. One benefit of this mode of startup finance is that the interest is charged only on the balance currently borrowed by you. The line of credit is usually used for short-term working capital to help improve the cash-flow or finance unexpected expenses.
Small Business Credit Cards:
Business credit cards can be a very cost-effective way to finance your startup business as many of these products come with zero per cent APR introductory periods, cashback and rewards programs. These cards can be used for covering immediate expenses while you wait for payments from customers and sometimes help in preserving cash for working capital or other requirements. However, small business credit cards are not ideal for funding large capital investments due to the very short-term nature of the loan and high-interest rates.
Online P2P platforms connect you directly to individuals and institutions looking for investment. These business loans are generally known as P2P finance and help you reach lots of debt/income investors. The platform charges a processing fee and interest rates on P2P finance can go up to 26% because of the risk involved for the lenders. A good credit score is also a pre-requisite to borrow from a P2P lending site.
You can use equipment financing to purchase equipment, machinery or vehicles for business use. Equipment finance is available through dealerships, banks and online equipment finance providers. Typically, the business loan is given by keeping the purchased equipment, machinery or vehicles as collateral and a processing fee is also charged. The main benefit of equipment finance is that you get the ownership of a valuable asset, the payments for which are spread over a period of time (generally one to five years). Equipment finance is a good choice for startup businesses which rely on equipment or machinery.
Small Business Loans for Startups:
Short-term small business loans are one of the best ways to finance your startup business. These loans are offered by banks and other RBI governed financial service providers. Small business loans from non-banking financial companies like Lendingkart come with features that are optimized for modern enterprises. For example, Lendingkart’s small business loans have a ticket size of ₹ 50,000 to ₹ 2 crores, which can be repaid in monthly or biweekly instalments of up to 24 months. Moreover, these loans come with lower interest rates and zero prepayment penalties. Lendingkart also offers a quick turnaround time for approving and disbursing your small business loan when compared to the time and hassle you face in applying for a business loan with a bank. You can get the money in your bank within 3 days of application if all your information and documents are in order.
The benefit of a small business loan of up to ₹ 2 crores is that it can be utilized for several things simultaneously, such as inventory or equipment purchase, streamlining your working capital and paying off immediate debts. A startup which has been in business for more than 6 months can apply for a small business loan with Lendingkart Finance.
These loans are generally given to very small business startups who have a less than ideal credit rating and no assets to collateralize. In India, these loans are offered by government programs like the Mudra Yojna. However, the loan value is often less than ₹ 50,000 which makes these loans not very useful for enterprising individuals. A plus point of microloans is that they are given at lower interest rates and are unsecured.
Online crowdfunding platforms allow you to raise small amounts of money from a large number of people. However, there is a difference between P2P platforms and crowdfunding platforms. In crowdfunding finance, you are not required to pay back the money you get. It is a kind of donation towards your entrepreneurial cause by people interested in your idea. But sometimes, crowdfunding terms may include a provision for equity share if the startup becomes successful. The crowdfunding platforms usually charge a one-time percentage-based fee from the capital you raise.
Wealthy individuals who invest in your business in exchange for an ownership stake are often called Angel Investors due to the debt-free nature of the finance. However, money raised from Angel Investors is often less than the money you can raise through venture capital. On the plus side, Angel Investors are less likely to interfere with your role in the organization.
Venture capitalists are a group of rich individuals/investors who operate as firm. VCs, give you debt-free finance in exchange for a percentage of equity in the enterprise. However, VCs are more hands-on in their approach and often induce an organizational change in your business to retrieve their investment. Also, funding by venture capitalists is given in several rounds, such as a seed round (generally known as Series A), and subsequent payments upon achievement of growth targets.
So, this concludes our list of financial vehicles you can tap into for getting a startup loan or investment. Our recommendation is in favour of small business loans from NBFCs because of the versatility and flexibility of this particular financial product. And, the unsecured nature of these business loans makes the deal even sweeter for small businesses and startups who lack assets for collateralization.
To know more about small business loans for startups, visit us at www.lendingkart.com.