Monday, October 8, 2007

Funding a Small Business

When starting a business, obviously one of the prime concerns is how to sustain funding. The entrepreneur or promoter group will have to bring in capital to the start up business, and quite often, in the case of small business owners this money comes from personal resources.

Under a private limited structure, promoters may borrow from close family members, but not from the general public. Borrowing from family helps circumvent procedure, which is inevitable while taking a bank loan, but could create other types of problems. It is advisable to treat the loan as a “business transaction” and agree to some terms of interest and repayment beforehand, even if they are softer than market.

The promoter’s equity/ funding does more than just cater to the needs of the company – it indicates commitment from those who have set up the business. Should there be a need to approach other sources for financing, this number will come up for discussion.

Taking a business loan from a bank might be necessary at some stage. Banks offer different types of SME (Small and Medium Enterprise) loans, aimed at financing working capital, equipment purchase and other needs.

If the loan is small (upto Rs. 25 lakhs), the conditions are softer and no collateral may be necessary. That being said, the bank will still examine the fundamentals of the business before handing over the money.

Rates can vary – a nationalised bank quotes between 9% and 13% for small business loans.

Once the business generates revenue and the order book fills, commercial finance becomes a real option.

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