It is good to open a new business but, only when you are sure of your business plan and how to arrange finance for your business. People might make mistakes in managing their finances once they enter the business. Yet, there are people who even drop best of their ideas because they fail to arrange the adequate amount of funds at right point of time. It is not that difficult to arrange the finance. The only thing is that you should know the right door to knock at the right time. There are basically two channels of finance for your small business – formal channels and informal channels.
Among the formal channels of finance, you can seek financial aid from banks and venture capitalists. Your financing need may fall into any of the following categories viz. long and medium term loans, short term loans or working capital loans, risk capital, seed capital and bridge financing. For these requirements, you can knock the following doors:
- Commercial banks ( also see best banks to get business loans)
- Regional rural banks
- Co-operative banks
- Small Industries Development Bank of India (for long and medium term loans)
- State Financial Corporations (for long and medium term loans)
- State Industrial Development Corporations (for long and medium term loans)
Also read about Mudra Finance Scheme
You can borrow a composite loan from commercial banks for a maximum of Rs. 1 crore. The composite loan includes both term loan and working capital loan.
In order to borrow loan from commercial banks or financial institutions, you need to apply formally for a loan along with the following documents:
- Balance Sheet and Profit and Loss Account for 3 consecutive years. These financial statements should belong to the firms owned by the promoters of the business for which finance is required.
- Income tax returns of partners/ directors of the business
- Registry and possession certificate of land which has been acquired for the business
- Memorandum of Association
- Articles of Association
- Detailed Project Report
- Budgeted values for Plant and Machinery.
Apart from these formal channels, you can definitely try your luck in arranging finance from the informal channels. Among the informal channels, there are three major sources – friends, family and those whom you can convince. It is always a better option to use your surplus funds in opening and running a business. Self contributed funds are cheaper than any other source of financing and moreover, with these funds you can enjoy hundred percent control on your business and can remain liability free. However, you must retain some of the surplus funds for raining day. Remember an old adage, “do not put all your eggs in one basket.” Following the lesson, one should not block all their personal money in the business. When you are able to calculate all your financial requirements and have reached a decision on the level of your contribution in the business, you must take a stand on the source of financing for the balance amount. If you have decided that you want to first try arranging funds on your own then you can definitely ask your family (including your relatives) for funds. The second source is your friends, i.e. people in your social circle. When you feel that you have exhausted both these sources of informal channels, then you must definitely try with the informal financiers and those you think can easily finance you. Getting money from informal financiers means that you will have to pay a high interest rate on borrowed funds.
I know a person (let us call him ‘A’) who had a brilliant idea but being from a middle class family, he did not have finance. He never wanted to arrange money from any of the financial institutions because of fixed financial liability. He searched for a person who has ample of funds and wanted to be an entrepreneur but did not had the expertise for running the business (let us call him person ‘B’). A explained his idea to B in detail and took his consent. They joined hands together and created a LLP (Limited Liability Partnership). The entire funding was done by B and the entire management and pain of establishing and running the business was taken care by A. This way he not only opened a business but has successfully managed to arrange finance for his idea.
Yes, it is a hard core fact that not everybody can arrange finance this way. But at the same time, one can surely explore the different alternatives of finance.