7 Popular Funding Options Available for Small Businesses

Knowing Your Loan Requirements

1. Loan Amount

   The first thing you need to assess before applying for a loan is the loan amount required. The old-age adage "the more, the better" doesn't apply here. The excess loan amount will only lead to excess interest amount, while a lower amount will fall short to accomplish what you have in mind. You must perform a thorough analysis of the funds needed before you decide on the final loan amount.

2. Purpose

   There are two primary purposes behind seeking SME Loans: to provide for working capital or to fund long-term requirements. You can choose one or both, but you must decide before you apply for the loan.

3. Repayment Tenure

   Another important parameter to be decided is the repayment tenure. A shorter tenure might put an extra burden on you to repay the loan. A longer tenure is safer but will result in higher interest amounts.

4. Current Financial Status

   Your current financial status is an important yet often overlooked factor. Often companies on the verge of bankruptcy or facing severe non-profitability take hefty loans to get the necessary working capital, but fail to repay them and are doomed. 

5. Collateral Type

   Since most SME Loans are secured and require collateral, you need to assess the collaterals you have at your disposal. Try to select the assets whose seizure (in the case you are unable to repay the loan) would not severely impact your business operations.

 
Also Read: Modern Business Funding Options To Consider

Popular SME Loans

1. Secured Term Loan

   A term loan is the most common and simplest type of loan, where you receive the total loan amount in the beginning itself. Secured term loans require some kind of collateral as a guarantee.

2. Secured Working Capital

   If the purpose of your loan is to fund the everyday operations of your business, then working capital loans work the best for you. Again, they are "secured", implying that some assets are required as a guarantee for loan repayment.

 

3. Revolving Working Capital

   If you are taking the loan to fund the working capital of your business but are not sure about the loan amount or the repayment period, then revolving working capital loans sound appealing. You can decide the repayment tenure and even apply to reborrow the loan amount. Though harder to get compared to other loans, it provides SMEs with enough loan flexibility. 

4. Purchase Invoice Finance

   Purchase Invoice Finance is a rather straightforward way of getting funds. Simply put, the lender gives you the funds to purchase orders from the suppliers in return for purchase invoices. Instead of getting the lump sum amount (like you do in working capital loans), the amount here is meant specifically for buying receivables from the suppliers.

5. Sales Bill/Invoice Discounting

   Invoice discounting is a quick way to gather funds based on the outstanding sales invoices. A portion of that amount is provided by the lender, usually along with a small fee. No collateral is required and the invoices are the only guarantee the lender needs. The best part about this option is the speed, as the amount is disbursed within a few hours. 

6. Machinery Term Loans

   If you want to invest in fixed assets, particularly in machinery and equipment, then Machinery Term Loans are your saviour. The tenure of the loan is flexible and can often be as long as 7 years.

7. Supply Chain Finance

   A different but growing popular type of loan, supply chain finance looks at the supplier's end instead of the customer's. In simple words, the lender does not pay the loan to the borrower (that is, your company) but directly to the supplier. The benefit of such an arrangement is that the lender has the transparency of where his/her money is being utilized, and the credibility of both the company and the suppliers come into play.

 
Also Read: Financing Options for Small Business Owners
 

Other Funding Options 

Medical Equipment Financing

This is another form of small business funding in India. If you are into a medical profession and run a clinic or hospital, you need to upgrade your medical equipment and devices regularly. Given the high cost of such equipment, purchasing them using cash from a business account can be difficult. To deal with such situations, financial institutions offer medical equipment financing.
 
Alos Read: A Complete Guide on Medical Equipment Financing

Project & Acquisition Finance

This is another common source of funds for businesses, mostly SMEs. You can opt for this loan if you want to invest in some special project or want to acquire some start-up or established business. To avail of this loan, your finances must be on the positive side, and you must own valuable business assets.
 
Apart from various SME business loans, small and medium-size entrepreneurs have more choices. To know about them, read on.

Personal Loans

If you don't know how to raise capital for business or are facing difficulty in getting a business loan,personal loans can do wonders for you. Personal loans are one of the easiest and quickest ways to cover your necessities and other expenses. Since the loan is flexible in its utilisation, you can use it for any lawful reason, whether personal or business. However, the fund value is one of the most significant disadvantages of using this loan. Personal loans, unlike business loans, provide a small sum of money. The maximum amount that you can get through this loan is Rs 5 lakh. In addition to the low fund value, the interest rate on this loan is a little higher than that of secured and unsecured business funding. Therefore, before you apply for a personal loan, evaluate your needs and then reconsider your decision.

Loan Against Property

Wondering how to raise funds for business? If yes, have you heard of the term mortgage loan against commercial property? A loan against property is another funding option accessible to small and medium-sized businesses. SMEs can avail of this loan only if they have any commercial property to put up as security. The mortgage loan against commercial property is best suited for those looking for a large amount with a longer repayment tenure and a lower rate of interest. However, one of the most significant disadvantages of using LAP is the risk of losing your property. In the event of default, the lender has full authority to sell your commercial property at auction to recoup their unpaid debts.
 
Also Read: Best Financing Options to Meet Your Business’s Needs

Eligibility and Documentation

The eligibility for SME loans is far easier than conventional corporate loans. You only need to meet the following criteria:

• Must either be a private/public sector company or a proprietorship. Self-employed businesses can apply too.
• At least 3 years in the current business.
• Businesses must have profits as per the industry norms.
• The credit score must be clear and satisfactory.

To apply, the following documents are required:

• The financial statements (audited) for the last 3 years, along with financial projections.
• KYC documents for all the directors and partners of the company.
• Registration certificates of the company, along with constitution documents./li>

Finding funds at the right time is critical for the success of any business, and SME Loans make that possible for you. There are multiple options to match the type of funding needs you might have, but the end goal is the same: ensuring that you have sufficient capital to run your business smoothly.
 
Disclaimer: This post was first published on 6 April 2018 and has been updated for the latest information, freshness, and accuracy.