Where can small businesses find money?

Ideas are a plenty but execution of such in small business setting need capital. Finding money (or raising capital) is not easy in general as the ideas in small businesses (or Startups) are risky to scale.

Every business requires money for its operations and to grow. Most small businesses fail because they run out of money. Also, unlike established businesses, small businesses would find it difficult to get loans from banks. Hence it is difficult for small businesses to find money for expansion. Where can small businesses find money?

1. Own savings

Most small businesses start with personal savings. It is a risk that entrepreneurs are willing to take. This is essentially known as bootstrapping where a small business survives from personal funds of its founders. Small business owners also need to make sure that they have set aside at least 6-9 months of their fixed personal expenses aside. Many business owners prefer to rely on their own funds till the business is having revenues of its own. This means that the financial burden on a small business is low. However, personal savings may not be enough for business expansion.

2. Loans from friends and family

The common saying is that small businesses can raise money from the three Fs- friends, families and fools. While it may not be easy to ask friends and family for money, it is an option that can always be considered. Rather than asking one individual for a lot of money, a small business owner can ask several people for small amounts of money. However, for this, it is essential that one has a proper business plan in place and is able to convince the person giving the money about when and how you plan to pay it back.

3. Angel investors and venture capitalists

If your business is in an emerging space, especially one that is backed by technology, you may be able to raise money from angel investors in exchange of equity. For this you would need a terrific business plan. However, this option would not be open for most traditional businesses which are not scalable and are not in emerging growth areas.

4. Business grants and loans

Private and government business grants are available for small businesses. Last year, Facebook and Amazon had announced a grant for small businesses. The World Bank had also announced a similar grant. While there are several government grants as well, most of them are meant for SMEs. One option for small businesses is the Pradhan Mantri Mudra Yojana which gives out loans to micro and small enterprises. Small businesses should be on a constant lookout for funds and grants for which they are eligible and apply.

5. Bank loans

While small businesses may not find it easy to get a bank loan for their business, it is an option that should also be considered. It helps if you have an existing relationship with the bank. Also, business loans become easier if you have a collateral to pledge. The bank would also want to see that your business has a healthy cash flow and revenue sources and your ability to repay the loan. All your documents need to be in order too.