Start-ups in the growing phase desperately need funds to purchase inventory, improve cash flows, update manufacturing processes, and scale up their business operations. Many leading financial institutions offer business loans for this purpose. However, banks at times can deny giving a business loan due to low credit scores, insufficient cash flow, and lack of collateral.
Whatever is the reason, a business loan denial can come out to be a setback for budding businesses. All their hard work and strategies go in vain when banks reject their business loan application. However, experts say this is not the end. There is a range of alternate funding options that can provide a financial cushion to such businesses. Keep reading on as we outline them one by one.
Experts believe that crowdfunding is a viable alternative for a traditional business loan. It is a funding system that involves two parties. It has an entity or individual in need of funds and a community of investors willing to invest funds. Please note that the lending party will expect recognition or rewards in exchange for their investment. Here are the advantages of going for crowdfunding:
- Offers access to funds without accumulating debt or giving up equity.
- Crowdfunding helps in hedging business risks and challenges.
- It is also an excellent marketing tool that gives organic exposure to the business.
- Crowdfunding helps in gaining credibility and goodwill in the market.
- It is a hassle-free funding option.
Venture Capital or Angel Investors
Depending on the current stage of the business, many companies may seek funding from angel investors or venture capitalists. So what are VCs or Angel investors? These are firms or individuals that are willing to pump capital into business ventures. Robust business growth or exit plan and a promising business model are the two major factors that will determine if you will get a loan or not. They are essential to gain the confidence of the investors. Why should businesses go for venture capital funding options?
- The best part about going for this funding option is it brings expertise and wealth to the business.
- VCs add value to the management by providing essential information, technical assistance, resources, and contacts.
- Angel investors are readily available.
- The loan processing procedure is hassle-free and quick.
- They can help in boosting market credibility and build a competitive brand.
Experts consider bootstrapping as a tough but rewarding finance alternative for a business loan. It is a method of self-financing a business project. Owners here use their existing resources to build their business from scratch. In other words, businesses will keep themselves afloat by utilising their savings and sales only. Apart from this, entrepreneurs can also take little support from friends and family. Here are some advantages of going for bootstrapping:
- Bootstrapping does not dilute ownership and allows 100% profit utilisation.
- It offers better control to the businesses. They have the liberty to change product design, shift the business model or reform goals without seeking permission from the investors.
- Bootstrapping is a stress-free funding option for businesses that aim to keep a check on their debt ratio.
Funding from Government Schemes
The Indian government rolls out several promising schemes to cater to the capital needs of businesses. All these schemes are designed to encourage budding entrepreneurs in the nation, generate employment, and uplift the underdeveloped sections of society. Many businesses who have been denied a business loan turn to these schemes to get loans at affordable interest rates. Here are the top three schemes to look for:
- Pradhan Mantri Mudra Yojana – MUDRA – Micro Units Development and Refinance Agency Bank provides loans to startups at low rates under this scheme. Businesses can take a collateral-free loan of up to Rs.10 lakh to regulate their operations.
- Credit Linked Capital Subsidy for Technology Upgradation – Businesses that look forward to implementing state-of-art technology in their operations can apply for a loan under the CLCSS scheme. The maximum loan amount here is Rs. 1 crore with a 15% subsidy.
- Credit Guarantee Trust Fund for Micro and Small Enterprises – It is one of the biggest loan schemes launched by the Indian government. The loans provided under this scheme are collateral-free. Businesses can apply for a loan of up to Rs. 1 crore here.
With angel investing and venture capital systems ruling the scenario, many businesses are actually unaware of micro-financing. To everyone’s surprise, microfinancing is becoming an increasingly sustainable and popular business loan alternative in 2021. As per the reports from the World Bank, over 500 million businesses have benefited from micro financing options.
It is an innovative way of lending loans to small entrepreneurs and businesses. Microfinance allows businesses to take a reasonable amount of loan safely and at par with ethical lending practices. Like any other loan system, micro-financiers also charge a rate of interest along with specific repayment terms. Here are the advantages of microfinancing for small businesses:
- Quick and hassle-free process.
- A profitable business loan option for women entrepreneurs who are functioning at the bottom of the pyramid.
- Experts call microfinancing the best financing option for home-based businesses.
- The majority of the loans provided under microfinancing are collateral-free.
- Many enterprises go for microfinancing as it promotes entrepreneurship and self-sufficiency.
Businesses that want to go for 100% safe and collateral-free funding should opt for government business loan schemes. On the other hand, companies that require instant or quick funds can go for Angel investors and microfinancing. Last but not least, bootstrapping and crowdfunding are also viable business funding options that can give a boost to your business operations.
You see, the list of non-traditional business financing options is endless. But, businesses should pick the option that will help in realising their manufacturing and profit goals. Apart from this, it is also equally essential to weigh the pros and cons of every finance option to make the best decision.