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SMEs are an integral part of India’s economic growth. They need finance to sustain themselves and grow. The chief funding sources are –
1. Government Programs 2. Debt Funding 3. Equity 4. New ways of funding |
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Are you a small business owner? Do you have face bottlenecks with business financing? The Small and Medium Enterprise (SME) segment is an important part of the economy. It contributes a significant amount to the GDP and provides employment for many people. It also nurtures the entrepreneurial spirit of people especially in rural areas.
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Here are different types of funding sources that you can use to expand your business –
1. Government Programs/Institutions
The Government has set up institutions like Small Industries Development Bank of India (SIDBI) and National Small Scale Industries Corporation (NSIC), which help small businesses and micro businesses in various ways.
a.SIDBI has tie-ups with public sector banks to provide financial assistance to SMEs. It also provides refinancing options for term loans taken by SMEs from banks. Click here for more details.
b.Credit Link Capital Subsidy Scheme (CLCSS) for Technology Upgradation is a scheme of the government wherein the SME and Micro Small Enterprise (MSE) can get loan up to Rs. 1 crore and get a subsidy of 15% on purchase price of plant or machinery.
2. Debt Funding
a. Bank Loans – Banks provide loans for funding businesses. These can be secured loans and unsecured loans. Secured loans generally have a lower interest rate. The interest rate varies from 14%-28% depending on the bank, the type of business, cashflow of the business, profitability etc.
b. Overdraft facility – Here the business owner who has an account with the bank can withdraw more money than what is present in his account for an interest charge at an agreed rate. It is perfect for temporary funds.
c. Schemes for Women Entrepreneurs – Banks have special schemes for women entrepreneurs wherein the regulations on collateral are relaxed a bit and interest rates are discounted.
d. Bill Discounting – It is a concept where the bill raised on the client for a certain amount can be sold to the bank at a slightly lower value to get immediate revenue. Once you receive the money from the bank, the client can pay the bill amount to the bank.
e.Funding by NBFCs- Non Banking Financial Institutions like provide credit to SMEs and MSMEs. Cost of funding through NBFCs may be higher (more by 1%- 1.5%). From a borrower’s perspective, other factors like collateral, repayment terms might be better than those of banks.
f. External Commercial Borrowing _ SMEs in India can also get funds from abroad subject to RBI regulations. The regulations for SMEs are more relaxed. Many times, the cost of ECB is lower. Foreign lenders do provide more flexibility in payment terms sometimes.
3.Equity
You can get funding from Venture Capitalists (VCs), Private Equity Funds (PE) and angel investors. Depending on the type of business, stage of business and investor type, the loan amount can be from Rs. 25 Lakhs to Rs. 50 Crore. How do you approach them? You can connect to a VC through recommendations, merchant bankers or networking organizations like TiE or Indian Angel network.
Here is a list of registered Venture Capital Funds (VCFs).
4. New ways of funding
a. Crowdfunding and crowdsourcing are innovative ways of funding wherein you can approach large groups of people for funding your cause. It is easier to do this in an online community. For example, independent moviemakers use crowdfunding as a means to get funds.
b.Peer to Peer Lending – There are many online platforms that showcase really small scale entrepreneurs. People like you and I can lend money to them for an interest rate. The borrower does not provide collateral. It is more of social lending wherein people can help others to sustain themselves and hopefully fulfil some of their dreams. You can check Milaap and i-lend.in to know more.
Which financing sources have you used? Let us know your experiences in raising finance for your business.
1. Government Programs/Institutions
The Government has set up institutions like Small Industries Development Bank of India (SIDBI) and National Small Scale Industries Corporation (NSIC), which help small businesses and micro businesses in various ways.
a.SIDBI has tie-ups with public sector banks to provide financial assistance to SMEs. It also provides refinancing options for term loans taken by SMEs from banks. Click here for more details.
b.Credit Link Capital Subsidy Scheme (CLCSS) for Technology Upgradation is a scheme of the government wherein the SME and Micro Small Enterprise (MSE) can get loan up to Rs. 1 crore and get a subsidy of 15% on purchase price of plant or machinery.
2. Debt Funding
a. Bank Loans – Banks provide loans for funding businesses. These can be secured loans and unsecured loans. Secured loans generally have a lower interest rate. The interest rate varies from 14%-28% depending on the bank, the type of business, cashflow of the business, profitability etc.
b. Overdraft facility – Here the business owner who has an account with the bank can withdraw more money than what is present in his account for an interest charge at an agreed rate. It is perfect for temporary funds.
c. Schemes for Women Entrepreneurs – Banks have special schemes for women entrepreneurs wherein the regulations on collateral are relaxed a bit and interest rates are discounted.
d. Bill Discounting – It is a concept where the bill raised on the client for a certain amount can be sold to the bank at a slightly lower value to get immediate revenue. Once you receive the money from the bank, the client can pay the bill amount to the bank.
e.Funding by NBFCs- Non Banking Financial Institutions like provide credit to SMEs and MSMEs. Cost of funding through NBFCs may be higher (more by 1%- 1.5%). From a borrower’s perspective, other factors like collateral, repayment terms might be better than those of banks.
f. External Commercial Borrowing _ SMEs in India can also get funds from abroad subject to RBI regulations. The regulations for SMEs are more relaxed. Many times, the cost of ECB is lower. Foreign lenders do provide more flexibility in payment terms sometimes.
3.Equity
You can get funding from Venture Capitalists (VCs), Private Equity Funds (PE) and angel investors. Depending on the type of business, stage of business and investor type, the loan amount can be from Rs. 25 Lakhs to Rs. 50 Crore. How do you approach them? You can connect to a VC through recommendations, merchant bankers or networking organizations like TiE or Indian Angel network.
Here is a list of registered Venture Capital Funds (VCFs).
4. New ways of funding
a. Crowdfunding and crowdsourcing are innovative ways of funding wherein you can approach large groups of people for funding your cause. It is easier to do this in an online community. For example, independent moviemakers use crowdfunding as a means to get funds.
b.Peer to Peer Lending – There are many online platforms that showcase really small scale entrepreneurs. People like you and I can lend money to them for an interest rate. The borrower does not provide collateral. It is more of social lending wherein people can help others to sustain themselves and hopefully fulfil some of their dreams. You can check Milaap and i-lend.in to know more.
Which financing sources have you used? Let us know your experiences in raising finance for your business.
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