Josephine is a smart person with a creative bent of mind. She promotes a business idea at a business idea contest and wins a prize consisting of seed capital and funding. She uses the prize money and funding to convert her idea into a business. In the five years since she commenced operations, she is growing well. She now wants to expand and reach out to other markets to maintain the rate of growth. Obviously, she needs funding. How can she finance her growing business? Let us see what her options are.
Keeping in tune with innovative development in technologies, financing options too are innovating. Besides the traditional business loans, there are various options open to Josephine.
Equity funding is a traditional form of funding. In this form, equity investors enthused with Josephine’s business model would agree to invest in equity of Josephine’s company. Since Josephine’s business is showing signs of growth, she can command a premium for equity shares in her company. The advantage with this form of funding is the absence of pressure on making periodic payments as the equity investors do not expect any immediate returns. However, Josephine would have to forego a portion of her company and also contend with inputs from equity investors including a place on the company’s board.
New Age Funding
With the advent of innovative technology people such as Josephine attract investors who back creative businesses to succeed. There are various methods of funding that Josephine can tap into and they include
- Crowdfunding – using technology as the prime mover, crowdfunding is a modern form of funding growing businesses. The WWW has various platforms through which Josephine can obtain funds through crowdfunding. Crowdfunding works well with innovative ideas and proven success. Popular crowdfunding platforms include Kickstarter, LetsVenture and Catapooolt
- Angel Investors – individuals or group of individuals pool up funds looking for new business concepts that will succeed. They will back new business ideas such as Josephine’s and invest as angel investors
- Venture capital funding – this is a great form of funding for existing businesses as they can show proof of success. VCs show interest in growing businesses offering them funding as well as their experience and expertise to guide Josephine’s business and cash out when the business becomes a huge success
New age funding is catching on in India and many success stories dot the landscape such as Flipkart and Paytm. Instead of a loan for business Josephine can opt for any of the new age funding methods.
Factoring is a method in which Josephine can sell her receivables to a factoring company at a discount. To Josephine, receiving money from the factoring company is the same as receiving from the client but she will have to collect only the discounted amount.
Debt funding is another traditional method of funding. Here, Josephine can approach any lender including NBFCs such as Tata Capital to seek funds. Lenders offer a variety of loans suited to the requirements of business owners such as Josephine. Josephine can choose from among various loans such as term loan, working capital loan, machinery loan and equipment loan. These loans come under the umbrella of business loans with terms and conditions specified by the lender. Josephine can easily obtain any kind of business loan as her credentials are sound. The advantage of debt funding is the absolute control exercised by Josephine on her business as long as she makes regular payments to service the loan.
The central government and state governments in India have come up with innovative schemes to promote entrepreneurs both small and large. These schemes include
- The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS) – Josephine can borrow up to Rs 100 lakh under this scheme
- The Mudra Loan Scheme – under this scheme Josephine can borrow up to Rs 10 lakh
- Standup India Scheme – under this scheme Josephine can borrow up to Rs 100 lakh
These schemes offer funding at attractive interest rates to companies which satisfy eligibility conditions.
Personal Finance Options
If other forms of funding fail, Josephine can fall back upon her reputation with her family and friends and her own personal funds to leverage her goodwill. These include
- Peer-to-peer lending – Josephine can borrow from family and friends based on mutual trust
- Credit cards – she can use her credit cards as a short-term measure. In fact, this method is very useful if Josephine can repay the full outstanding without resorting to part payment
- Personal loan – Josephine can approach any lender such as Tata Capital and obtain a personal loan. The loan is easy to obtain as the formalities are minimal and disbursal is quick.
However, these forms of funding are best suited for short-term funding and smaller amounts. The advantage here is the quickness of receiving the funds without any hassles as mutual trust is the basis for this form of funding.
The various schemes mentioned above are some of the funding options available to Josephine and business owners like her. The main thrust of all the funding options is the robustness of the business model and the high expected value for the success of the business. If the business model has high probability of success, funding is not a constraint for that business as the options for funding are many including traditional loans for business options.