Every business, whether big or small, needs a strong financial back-bone upon which it operates. The daily running expenses of the business, acquiring assets, buying raw materials, administrative expenses, selling and distribution overheads – all require a source of finance. This source of finance is called the capital investment. This capital investment is necessary for starting an enterprise and successfully running the business.
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The scale of production determines whether an enterprise is a small business or a large one. The capital requirement is also directly related to the size of the business – larger the business, higher would be the capital required and vice versa. Small and medium enterprises though, require lesser capital and funding. What are their options for arranging the necessary business finance?
There are various avenues from which small businesses can source business funding. Here are a few examples of finance options that are currently available to small businesses:
- Personal savings – whatever you have saved over the years is what you would typically resort to, when you need to finance your business. Every entrepreneur, initially, uses his personal savings for business funding. Usually, personal savings are not enough to fulfill the entire business requirement and though it is the first resort, a businessman needs to look at other options of finance.
- Business loans – when personal savings fall short of meeting the business funding requirements, the next, most popular choice is opting for a business loan. Banks, financial institutions and more recently, digital lending companies grant business loans to small and medium-sized businesses for financing their operations. These business loans are granted based on the business capacity, size of operation and the collateral secured. Interest is charged on the total amount of loan borrowed. Business loans are available in various types. Personal loans, gold loans, loans against securities, etc. are the different kinds of business loans which a businessman can avail.
- Angel investors – individuals with immense wealth are inclined to invest in small businesses which have a potential for growth. In return for their investment, they usually hold a share of the business and consequently get a share of the business profit too.
- Venture capitalists – while the concept of venture capitalists is similar to angel investors, they differ in the size of funding. Venture capitalists also invest in small businesses and own a percentage of the business but the size of their financial investment is higher compared to what angel investors invest.
- Line of credit – This is like an overdraft facility. Banks and financial institutions allow small businessmen to take an extended credit facility for their business funding. A small interest is charged on the amount borrowed. The best part about this facility is that one can borrow as per his requirement and pay interest on the actual amount borrowed.
- Crowdfunding – another source of business funding is crowdfunding. Crowdfunding involves availing finance from a large number of people who contribute a small portion of the capital each. This type of funding is usually done using the internet and the people who finance the business include friends, relatives, individual investors, customers, etc.
So, small businesses have a range of options available to them for funding their business. Though business loans are popular, other avenues like angel investors and venture capitalists are also finding their footing in today’s developing economy.