For any business, the ability to raise money is a major concern. One of the most common ways to do so is by taking out loans.
There are various factors that determine the interest rate on a business loan. These include the type of lender, nature of the business, credit score, market trends, and the number of loans required. These loans can be renewed after a set period if the company can repay the money within the predetermined time frame. Small business loans range from short-term to long-term funding. A list of small business loan options is provided below.
Why is it Difficult for Small Firms to Get a Business Loan?
There are several reasons why business funding is difficult for small companies. Although banks wish to lend to small businesses, outdated borrowing procedures have made business loans unfavorable for small enterprises.
Most banks will not offer a business loan to startups because they require a five-year track record of a healthy business before lending.
Traditional Options for Business Loans
There are several reasons why small business owners might look into different business funding options.
Here are three of the most prevalent options:
- Usually, the approval process for traditional bank loans takes weeks. On the other hand, a certain alternative business loan can deliver funding in as little as a few days.
- Applicants with credit scores below the specified limit vary among loan providers. As a result, small businesses with a poor or no credit score will almost certainly be turned down by banking institutions.
- Traditional loans have more requirements than all small business owners can fulfill. In such circumstances, alternatives to small business loans can be helpful.
Therefore, MSMEs choose alternative sources for business funding. The six different alternative options for small business funding are described below.
Funding Alternatives to a Business Loan
Below is a list of funding alternatives for small business loans:
- Government SchemesA scheme known as the Pradhan Mantri Mudra Yojana provides loans to small and medium-sized businesses. These business loans are provided by RRBs, cooperative banks, commercial banks, MFIs, NBFCs, and other financial institutions. In this framework, loans are divided into three groups called Shishu, Kishore, and Tarun, each of which corresponds to a different stage in the growth of a company. Kishore and Tarun stage loans range from INR 50,000 to 5 lakhs and INR 5 lakh to 10 lakhs, respectively, while Shishu stage loans start at INR 50,000. These loans don’t require any security and can be used to purchase an automobile or a factory, raise operational capital, or buy machinery.
- Bootstrapping a New BusinessBootstrapping, often known as “self-funding,” is a fantastic way to get capital for a startup, especially if you are just getting started. Typically, first-time entrepreneurs have difficulty obtaining funding due to a low credit score. You can use your own money to invest or ask friends and family for assistance. This will be straightforward since there are fewer requirements and formalities, as well as lower raising costs. The majority of your loved ones and friends are open to discussing an interest rate with you.Due to its benefits, self-financing or bootstrapping should be taken into account as a first funding alternative. Once you have your own money, you are firmly tied to the business world. Investors will view this as a plus in the future. This is only acceptable, though, if your basic needs are minimal.
- Business Loan Working CapitalSmall businesses use these loans to meet their short-term needs for liquid liquidity. When daily operations require a large amount of cash, a working capital loan can be quite helpful. Depending on the firm’s credit profile, firm capital is frequently provided for a duration of six months to a year at interest rates that range from 12 percent to 16 percent.
- Term Loan Options for a Business LoanWhen investors are interested in a company’s offer, they take out term loans to cover their capital expenses. Small business financing is based on a company’s credit history and has a predetermined duration and lower interest rate. These are frequently offered unsecured, although they can also be secured by collateral. They may have a fixed or variable interest rate and last for a long period of time, such as 10 to 20 years.
- Cloud Funding Options for Business LoansThe idea of crowdsourcing is fundamentally similar to mutual funds. This choice contains numerous investors, each of whom makes a predefined financial contribution to your objective, business idea, profit-making targets, and strategy. You only need a group of enthusiastic supporters for your business idea.Crowdfunding is becoming more popular since it makes sure that other skilled market players agree with your proposal.
- Venture CapitalistVenture capitalists are a safe option for large wagers because they provide actively managed funds looking for startup companies with a high possibility of success. The expertise and supervision that come with venture capital investments are their greatest features. Venture capitalists (VCs) frequently buy shares before selling them when the business is purchased or goes public. Typically, venture capitalists look for companies with a strong team and enough traction. If you choose venture capital funding, you must be prepared to follow their strict rules and take their advice.
Alternative business loan options could help you avoid time-consuming delays and rejections when trying to raise funds for your business. Having a solid business plan to support your firm and increase your chances of receiving cash is crucial, regardless of your funding strategy. You may always seek the advice of professionals like Piramal Finance if you need financial assistance. There, you can find more blogs and articles related to loans and business funding.