Sources of business finance

Finance is a basic necessity when it comes to maintaining a business. You need a significant sum of money to start a business venture and enough working capital to manage your day-to-day business expenses. This article explains various sources of business finance that will help you get the funding to run your business.

What are the sources of business finance?

There are many sources of business finance that a business owner or an entrepreneur can explore. The sources of business finance can be divided into internal sources and external sources of finance.

Internal sources of business finance

If you have a full-fledged business establishment then you can source funds internally through:

• Retained earnings

When a company earns a profit some of this money is retained, which is accumulated over a long period of time to be used for a big business expense in the future. This is called retained earnings, a permanent source of finance for companies.

Retained earnings enhance the capacity of the business to handle unexpected losses and help it stay afloat during an economic meltdown. Since these funds are generated internally, you get operational freedom and flexibility to use this money.

• Selling assets

If you need to purchase new machinery or upgrade existing technology, one of the easiest ways to raise money is by selling existing business assets that are not in use. Business assets that can be sold include machinery, equipment, excess stock, furniture, etc. You can even try leasing land that was obtained for business purposes but is not being used.

• Bootstrapping

Bootstrapping means self-financing a business with capital invested by the owner himself/herself. This term means that the business owner funded the business using personal savings or money collected from family and friends.

External sources of finance

External sources of finance refer to the funds that you are sourcing from external parties. Businesses might choose to use external sources of finance because they do not have enough retained earnings, or they have decided to reserve retained earnings in case of emergencies.

External sources of finance are given below:

• Equity financing

Equity financing is selling a portion of your equity to raise money for business expenses. This option is availed by companies using two methods issuing the private placement of stock with investors and public stock offerings like IPO (Initial Public Offering).

Private placement of stock can be with venture capital firms or angel investors. When a firm sells its equity shares to a venture capital firm, the firm gives them the quoted price of the shares. The fund thus obtained is known as a venture capital fund. Venture capital funds are usually used for funding the early stages of business.

Angel investors are high net worth individuals who invest in small businesses in return for a stake in the company. These investors could be family members but are often famous people who are known fund small businesses. Ratan Tata: the former chairman of Tata Sons, Vijay Shekar Sharma: the CEO of Paytm, and Sachin Bansal: the co-founder of Flipkart are some of the famous angel investors from India.

• Overdraft and cash credit facility

Banks provide businesses who are current account holders with a credit facility called overdraft. Bank overdraft facility allows businesses to overdraw money from their bank account when the bank balance reaches zero or is too low to pay off a desired expense.

Cash credit  works quite similar to an overdraft facility but the overdrawn sum of money from the bank account is given as a collateral loan to business owners.

• Funding through government schemes

To encourage business development in the country, Government of India has launched several government schemes that extend business loans to businesses at subsidised interest rates. The government has placed importance on the MSME sector by announcing several MSME loan schemes.

Some of the important government loan schemes for business are given below:

Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE)

CGTSME is a government business loan scheme for small businesses. It offers financial assistance of up to ₹2 Crore to new businesses and startups. This is a collateral free loan reasonable interest rate to help new and existing small businesses to fund manufacturing, services and retail related business activities. The scheme can be availed through banks and NBFCs.

Pradhan Mantri Mudra Yojana (PMMY)

Commonly known as MUDRA loan, this government loan scheme offers loans of up to ₹10 Lakh to micro and small businesses. The PMMY loan scheme is divided into three categories namely Shishu, Kishor and Tarun. These categories point to the requirement of credit facility and the stage of growth development of the borrowing business unit.

Stand-Up India

Stand up India is a loan scheme that provides financial assistance to SC/ST and women entrepreneurs.  The loan amount is between ₹10 Lakh to ₹1 Crore. The loan is provided for up to 75% of the project cost. The borrower needs to arrange for the remaining 25%.

• Business loans

A business loan is money that can be borrowed from a financial institution by a company for funding business activities like expansion, releasing a new product in the market, renting/leasing a property, buying a new commercial vehicle, etc.

You can apply for a business loan at banks and NBFCs. All financial institutions have their unique business loan products with special features like relaxed eligibility, low interest rates, faster approval times, etc.

There are also online platforms like Tata nexarc’s Finance that will help you get business loans that will suit your specific requirements. Once you post your requirement, the platform will match your loan request to offers from various lenders and give you the best loan offer. With Tata nexarc’s Finance you can get a loan approval within 5 minutes and funds deposited in your account within 72 hours.

To apply for business loans on Tata nexarc, explore Business Loans now.