Various Credit Alternatives for Entrepreneurs Owning Small Businesses

There are currently more than 42.5 million SMEs in India, employing just over 40% of the total Indian workforce. This sector accounts for 45% of the country’s total manufacturing output and 40% of its exports.

The start-up culture has also caught up with 2018 registering more than 1,200 of them. Most of these start-ups are tech and consumer services companies. Incidentally, SMEs account for 24.63% of India’s service sector GDP.

The business environment in the country is certainly encouraging for entrepreneurs to start their own small business offering kind of facilities and launching new schemes like start up business loan, stand up India and other more. One of the challenges you might face in that pursuit is the lack of funds, and the resultant need to arrange for it. There are several avenues one might take, some of which, like SME loan, are discussed below.

Credit alternatives for small business owners

In broader terms, there are two available options for small business entrepreneurs to arrange capital and start or run their business. Viz. –

• Debt financing
• Equity financing

Equity funding, on the other hand, entails raising funds by selling a certain percentage of the ownership to an investor. You may approach venture capitalists, angel investors or even your acquaintances for investments. Equity financing is quite advantageous for start-ups as they do not have to bear the burden of repayment during the initial years of operation.

In fact, equity funding is gaining momentum in India with investments going up by more than a hundred per cent from Rs. 14,000 Crore in 2017 to 29, 300 Crore in 2018.

Debt financing refers to borrowing money through financial institutions or privately. The most significant advantage of this method of funding is the lender has absolutely no say in how you run the business. They are also not entitled to any profits that your business makes.

Types of debt financing

Even within debt financing for SME, there are numerous options available.

• Term loan: Term loans are what you are referring to when you say business loan. These advances are extended to businesses for a pre-set amount of time, usually between a year and five years, and you have to pay monthly EMIs until it is repaid in full.

Best for: Slightly mature businesses who want to expand or need working capital.

• Business line of credit: This SME lending process is suitable for businesses which have unpredictable fund requirements. A line of credit gives one access to a pool of funds from which they can draw any amount they require. Interest is levied only on the funds used.

Best for: Seasonal businesses with unpredictable cash requirements.

• Equipment loan: Certain financial institutions offer credit, especially for buying equipment to set up for your new or existing business.

Best for: Tech start-ups that require expensive equipment and setup.

• Working capital loan: One of the most significant challenges that every small business owner faces is funding their day-to-day operations. A capital finance for your working capital needs can come to their aid.

Best for: Small businesses at nascent stages of development.

As a small business, you have numerous ways of funding the growth of your enterprise. Pick one that corresponds best with your needs and the stage of your business’ development.