If you are the owner of a newly launched business, it can often be difficult to maintain a balance between your current business assets and your current liabilities. If this balance is disturbed, your business may find itself in a working capital deficit and you may have difficulty meeting current expenses. That’s when choosing the right loan option can be your best bet.
Let’s see what options exist to obtain working capital for your new business.
Business loan
- One of the most popular and effective ways to raise working capital for a new business is to obtain a business loan from a bank or financial institution.
- A business loan is a form of loan agreement between the lender and the business owner. Under the terms of the agreement, the lender agrees to pay a specific sum of money to the owner of the business, provided that the latter reimburses it, plus interest, according to a predetermined schedule.
- The period during which the loan is used is known as its term and the regular amounts repaid by the borrower are known as monthly equivalent payments or EMI.
- While it is possible to take out a personal loan and use it for your business purposes, it is often more beneficial to opt instead for a specialized loan designed to meet the specific needs of your business. For example, some business loans are intended to help you start your small business, others are intended specifically for the purchase of new equipment or machinery.
- Unlike traditional business loans, new age business loans are designed to provide greater flexibility to the borrower, allowing them to make a wider choice of tenure.
- However, these loans generally require a high credit rating for the company and the individual sponsors. Depending on the creditworthiness of the business and promoters as well as previous payment history, these loans could be secured by collateral such as personal property, stock, or other similar secured collateral.
- Depending on whether these loans are secured or unsecured, under the current interest regime, rates can vary between 8% and 18% per annum.
Business line of credit
- A business line of credit is often described as a hybrid of regular loans and business credit cards.
- This is a type of revolving loan offered by banks and financial institutions that gives you access to a specific amount of capital as a business owner.
- You can use this capital as needed to meet the needs of your new business and then repay immediately or over a period of time. As soon as the offered capital is borrowed, the interest rate is applied to the amount.
- A business line of credit also requires the borrowers approval from the lender, which is determined by their credit scores, the same way business loans and regular business credit cards work.
- The commercial line of credit works in the same way as a commercial loan in terms of credit score, credit history and collateral requirements.
Business credit cards
- Business credit cards are ideal for separating business and personal expenses.
- Also known as business credit cards, these forms of credit cards are specifically assigned to a business, not an individual, to meet that business’ regular financial needs.
- They offer business owners the ability to easily access short-term working capital. These credit cards can be used to make a variety of purchases, payments and reservations that may be necessitated by the demands of business operations.
- If the required working capital isn’t substantial, your business credit card can easily help you fill in any financial gaps you may encounter without having to spend time waiting for approval.
- If you have a new small business, having a well-maintained business credit card can also help your business build credit over time and improve your chances of loan approval in the future.
Partner with a Fintech company
- You might consider partnering with a company that specializes in exactly the aspect you want to seek working capital for.
- Fintech companies are financial institutions that use technologies such as cell phones and computers to provide financial services to customers. They can be any size, from a startup to a large organization.
- They have specialized expertise, programs and platforms designed to inject liquidity into the supply chain finance ecosystem and help raise working capital for new businesses.
- Compared to traditional means of delivering financial services, fintech companies are often more technologically efficient.
- Applying for a loan from a fintech partner is usually completely digital. One can apply directly on their websites or apps and expect a response within 48-72 hours.
Angel Investors
- Angel investors are wealthy individuals who seek to provide financial assistance to new businesses and ventures. This financial assistance is often offered in exchange for an equity stake in the business, usually in the form of equity.
- Depending on the type of investment and participation they seek, angel investors can either provide one-time financial support or continue to invest and support the new business through various processes.
- Angel investors are often on the lookout for new, innovative business opportunities and often like to participate in various aspects of the companies in which they invest.
- When approaching an angel investor, it’s best to have a clear, detailed pitch deck that illustrates why your business is essential and how you plan to expand it over the next few years.
- There are several organized forums for angel investors to come together for investment opportunities. Some India-focused angel investment organizations include Mumbai Angels, LetsVenture, Indian Angel Network, Venture Catalysts among many others.
- You can submit your business plans or presentations directly to these forums through their websites.
Friends and family
- Taking a loan from close friends and family members can have obvious benefits.
- If you receive a loan from your relatives, you are likely to receive it quickly and without hesitation. It also has the advantage of bypassing the credit approval process.
- However, involving family members and friends in business can often be tricky and easily complicated.
- If you are unable to repay the loan amount within the promised time, relations may become strained and friction may arise.
- Ideally, taking out a loan from friends and family should be considered an option of last resort or handled with extreme caution by establishing clear terms and maintaining a professional approach to repayments.
