The failure of small businesses is a cause of concern for everyone. More so because a standard statistical report of the Small Business Administration(SBA), US confirms that merely 33% of the business startups can survive beyond the first 10 years.
The reason behind the failure ranges from lack of planning to the nature of the product and its demand in the market. But one reason that stands at the top of all the r is the lack of proper funding. Insufficient capital or wrong prediction about the requirement of capital is the major cause of breakdown or bankruptcy in business.
The traditional method of financing
Whenever you think of ways to fund your business, the first one to strike you is ‘bank loans.’ While small business loans are the easiest and safest method to fund a business, it needs to be kept in mind that bank loans can be time-consuming as a lot of paperwork has to be done along with the submission of the required documents. It is difficult to choose a proper loan scheme catering to your requirement; otherwise, you may fall into a trap that can result in the loss of your personal savings.
However, there are some institutions that provide loans with low-interest rates, like the Small Business Administration (SBA). But the problem with these types of loans is that it is difficult to get a loan for the second time after the first one. So, only the ones who spend wisely and efficiently can apply for this type of funding.
There are many creative ways to raise funds for your business that will ensure the smooth flow of capital. Let us look at some of them:
Innovative ways of raising funds
When you fail to get loans from the bank, crowdfunding comes to the rescue. The ‘crowd’ in crowdfunding are the investors or other individuals who are convinced of your business’s nature and are interested in investing in it. Crowdfunding is different from other methods because it would promote your business along with finding investors. It is possible to reach out to more people through crowdfunding than in any other way.
Technological advancements and social media had made crowdfunding a popular method of raising funds. Discussing your business strategy with more and more individuals, you will be able to modify and refine your concept of business according to the market need. With crowdfunding, one is liable to satisfy the crowd that has invested in the business. This will help you to be more responsible and efficient in your business.
Types of Crowdfunding
- Donation-based crowdfunding
The most common type of crowdfunding is in the form of donations. In this type of crowdfunding, investors do not expect any return on the amount donated. This type of crowdfunding can be mostly found during natural calamities.
- Equity-based crowdfunding
In this type of crowdfunding, investors are provided with some equity shares, ensuring their part-ownership. Through these shares, investors receive their share of investment in the form of a dividend.
- Reward-based crowdfunding
In reward-based crowdfunding, the return is not in financial terms. Rather, investors are provided with their returns by means of production or services.
Venture capitalists are investors of your business if your steady growth in the market convinces them. Often, these venture capitalists invest in those small first that stand a chance of being acquired by a large firm or by the public. This type of funding usually comes with high-interest rates. These investors can also demand a share of ownership in return for their investments. Venture capital is recognized as a validation of the business firm to have the potential to grow in the market. Firms like Helion Venture Partners, Intel Capital India, and Sequoia Capital India invest in many small startups that have the potential for growth.
As the name suggests, Angel investors are individuals who have high net-worth and are interested in investing the same in your business. Unlike venture capitalists, angel investors do not have strict criteria to invest in a firm. These individual investors have a risk-taking attitude and are keen to extend their help to small business startups.
These investors usually help in return for equity shares and share in ownership. Apart from the financial backing, another important feature of angel investors is that they do not pressurize you for returns in case you suffer a failure. India Angel Networks and Hyderabad Angels are among the top angel investors in India.
Contests and events can be a great way to raise funds for small businesses. You can participate in these contests and exhibit your creativity to win the contests. Usually, these competitions are held to support the innovation and creativity of young businessmen. So, the ones who are worrying about the popularity of their product in the market and difficulty in raising funds for it can grab the chances through these contests. In India, PRISM’s Technopreneur Promotion Program and NASSCOM’s 10,000 startups program are among the leading contests funding the small business.
This can be a fruitful way of funding your business in the initial stage. Generally, incubation programs are established by state governments. However, many private institutions provide incubation programs. In a short span of -8 months, these programs would provide financial backing along with mentoring your business. Business incubation will also help you accelerate the growth of your business within this short time.
Business credit cards
A business credit card is a hassle-free method of raising funds while there is less time for other options. You can simply use the business credit card while it is free of any interest rate. However, you can only use the business credit card if your business is sure to return the amount invested.
But while using a business credit card to raise funds, you should choose wisely so that it has the lowest interest rate and caters to your business requirements. It is not advisable to use a business card in the early stage of a business as it comes with a very high-interest rate.
Considering the pros and cons of using a business credit card, businessmen who are willing to take risks to enjoy the benefits can move ahead with this method.
Government and Corporate Grants
There are many grants offered by government institutions and corporate ones that aid the growth of small businesses. Though it is not easy to qualify for these grants, it will solve your problem of insufficiency of capital for your business once you get one. Government institutions such as the US Small Business Administration (SBA) and private institutions like Goldman Sachs and many more are willing to provide funds for your business only if you qualify for it.
Family and Friends
Raising funds for small businesses from family and friends can be the safest way one can think of. This financial help would come with interest rates that can be negotiated. Investments from friends and relatives could be in the form of a loan, a gift, or in return for part-ownership. But this method can be more secure than the investments from corporate firms. In case your business is facing a breakdown, your friends and relatives would not pressure you for the returns. There are hardly any difficulties in this way of raising funds. This method can opt for both small startups as well as large-scale businesses.