Due to COVID-19 outbreak there if Global Financial Crunch, government is giving various opportunities for finance through various schemes for MSME but there is financial crunch to big organizations also what about them.
In this Write up I am going to elaborate major sources of Business Finance in India, if you are looking to raise capital, here are the six alternative sources of business finance you can explore. Also as a financial expert I am going to get the analysis of various options of funding. As COVID-19 outbreak whether investing in MSME or other business is an opportunity for them or not.
5 Methods of financing your Business are as follows (There are many other also but these are the major and effective ones), these are the major alternative of finance:-
Read more about the funding alternatives below
Crowd Funding
Crowdfunding is a way for people, businesses and charities to raise money. It works through individuals or organisations who invest in (or donate to) crowdfunding projects in return for a potential profit or reward. Originally Crowd Funding was used by non-profits to gather donations. There are various types of crowd funding that can be used by the Business owners: –
- Equity Based/ Investment Based Crowdfunding
- Reward Based Crowdfunding
- Debt Based Crowdfunding
Crowdfunding is a new concept and investing in young businesses can be very risky. The main risks of investment-based crowdfunding are (Investor Point of View):
- The business you invest in might go bust. Many new businesses fail in the first few years, so you could lose all your money.
- The return is not guaranteed. The shares may not rise in value and you may not receive any dividend payment (a share of the profits).
- It may be hard to sell the shares. The shares are normally unlisted, which means you may not be able to sell them easily in the way you could sell shares in a big company that’s listed on the stock market.
- The crowdfunding platform itself may go bust. This could mean you lose money if you’d paid the crowdfunding website but it goes bust before your money was invested with the business.
Analysis: – During this period Under Crowd funding it is quite possible that business owners could able to raise money under this outbreak if we see the positive side of this it is the opportunity for these crowdfunding investors to take this opportunity as a good idea under this pandemic could result in good returns.
Angel Investors
- Angel Investor are also known as private investor, seed investor or angel funder, these are the high net worth individual who provides financial backing to small startups or entrepreneurs in exchange for ownership equity in the company. There are various top angel investors who are interest to fund various new ideas of startup and small businesses.
Key Takeaways under Angel Investors: –
- An angel investor is usually a high net worth individual who funds start-ups at the early stages, often with their own money.
- Angel investing is often the primary source of funding for many start-ups who find it more appealing than other, more predatory, forms of funding.
- The support that angel investors provide start-ups fosters innovation which translates into economic growth.
- These types of investments are risky and usually do not represent more than 10% of the angel investor’s portfolio.
Analysis: – Angel investors as already mentioned above are individuals and will invest in the small businesses and could give you only limited capital, so under these circumstances of COVID-19 it is quite difficult to find these types of investors who invest in your business unless the business is doing more that what they expect.
Venture Capitalist
Under this type of funding the investor comes at the later stage when business is at the stage of growth, they provide capital to firms exhibiting high growth potential in exchange of stake in the company, Venture Capitalist invest in the businesses which are already earning i.e. making money. For getting invested from venture capitalist you will need to have a strong and sustainable business model, sales records which are proven and strong customer base along with strong management team.
Points to keep in mind Venture Capitalist Funding: –
- Venture Capital investments are high risk because the capital invested is usually unsecured – if the business fails the equity investment is lost.
- Venture capital firms look for a high return for their investment by owning a significant portion of the company; up to a third or more is not unusual.
- They often require representation on the company’s board, so they have significant control over important decision making.
- A close working relationship can be useful, as Venture Capitalists can provide business expertise and assistance with planning.
- The management team will need to show that their product is viable, that their growth plans are credible and that the balance of risk against expected profits justifies the investment.
Analysis: – As Venture Capitalist only invest in the businesses which are earning profits and are in the growth stage, in the current scenario it is quite difficult to find the venture capitalist as from last 4 months the growth of business has impacted drastically and most of the businesses growth have declined to a great extent.
Peer to Peer Lending
These are the new age concept under which retail investors to lend money to peers or small business via a fintech company’s digital platform. It is in the form of loan under which the interest obligation starts from 12% minimum. The cost of the borrower is directly proportionate to the risk involved for the lender. These Loans are good option for Stop Gap and Working capital requirements with speedy approvals and disbursal.
Analysis: – Due to COVID-19 there is shortage of funds in the market, and the companies tends to keep the fund for there working capital requirement in this scenario it is not possible for these companies to lend the money to their peers or to transfer the capital to other businesses so this type of funding will also not be possible in these circumstances.
Government Schemes
As government has come with various schemes of Loan and funding in India, you could avail from various schemes such as: –
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- The Credit Guarantee Scheme which provides small businesses and first generation entrepreneurs with collateral free credit.
- Pradhan Mantri Mudra Yojna
But these types of schemes are only meant for small businesses which are registered under Micro Small and Medium Enterprises (MSME), Under the 20 Lakh Crore Package announced by the government as a relief package various other schemes have been announced by the government. These could be availed by the MSME’s only.
Analysis: – Under this situation of COVID-19 outbreak these are the best alternative for the companies to raise fund from but the only flaw in this funding is this is only for the Micro small and Medium Enterprises while for other big companies’ other methods are required to be kept in mind.
Stay Safe Stay Healthy!!
Disclaimer: – The information compiled are my person observation and Interpretation of various published articles and other online material available, The Author and publisher disclaim any liability in connection with use of this information.
Chartered Accountant and Experienced Professional with a demonstrated history of working in the financial services industry.