The Indian financial market offers a range of funding sources for businesses. A decade back, the number of external financing options for an organisation was limited. So, businesses usually relied on operating profits for the funding of different activities.
Flourishing technological developments and digitisation across the financial market in India have, however, led to the emergence of multiple sources of finance over time. Besides banks and investors, organisations have the option to opt for institutional sources like NBFCs and fintech companies. These different funding choices have thus made it easy to avail finances at competitive costs.
Selecting a suitable funding option from the available finance sources in India can be challenging. It is more so if a businessperson is not well versed in it. That’s why it is essential to understand the different sources of finance to navigate the options better for a suitable choice.
Broadly, there are six financing sources that business enterprises can utilise. These are illustrated below –
It is perhaps the commonest of all financing sources for private organisations. Term loans denote all credit facilities that financial institutions, like banks and NBFCs, extend for more than 1 year.
Also called business loans, these credit facilities do not typically involve any end-use restriction. Borrowing enterprises can utilise term loans to address an array of financial obligations.
In most cases, organisations opt for term loans to mitigate mid to long-term objectives, such as investing in business expansion, purchasing equipment, developing or buying long-term assets, etc.
If it is an unsecured term loan, a business may have to incur considerable cost to service it. Secured credits, like a mortgage term loan, come with a comparatively lower cost and a more extended repayment tenure option.
Invoice discounting service is a preferred source of financing for various business organisations. This credit facility allows businesses to streamline their working capital cycle efficiently, ensuring smooth day-to-day operations.
With this financing service, businesses can utilise the unsettled bills of debtors to acquire a cash advance. Lending institutions provide a loan against the value of such invoices at a discounted rate. When the debtors repay, the business organisation forwards the advance amount to the lender.
This financing source has gained momentum among business organisations because of a simple and hassle-free process. Moreover, businesses can leverage the credibility of their high-end debtors to acquire funds with ease.
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Equity funding involves liquidating a portion of an organisation’s ownership as stock units for external entities to invest in. Several entrepreneurial ventures begin with this financing option. Sources of business finance for this include venture capitalists and angel investors.
Several organisations also opt for equity funding midway by turning from a private to a public enterprise. It involves making an Initial Public Offering (IPO), where it issues stocks for investors at large to buy.
Publicly traded companies can issue new stocks to raise capital, which they usually utilise to address mid and long-term funding goals. Organisations do not need to disburse fixed interest to shareholders. But, stockholders hold a claim on the company’s profits and also enjoy voting rights.
Several organisations also opt for inventory loans to access external funding. Institutional sources like banks and NBFCs offer this financing option. Businesses can leverage their inventory to avail cash advance from lenders against their stock value.
Once disbursed, the borrowing organisation can use the loan amount to fulfil several expenditures- from addressing a shortage of working capital, investing in expansion projects to hiring employees.
This credit facility is, however, somewhat different from other secured loans. The borrower can sell the pledged asset, i.e. the inventory, and replenish it subsequently. With any other secured credit, one cannot trade the collateral.
Businesses can also issue corporate bonds to raise capital. It acts as any term loan wherein the business needs to repay the principal along with fixed interest on it. However, in this case, market investors, and not just financial institutions, can lend funds to an organisation.
Companies can use this financing source in India in tandem with equity capital to address mid- and long-term financial obligations.
Businesses can also resort to P2P financing to address a wide range of expenses. Peer-to-peer financing takes place via dedicated portals. There, companies can post their monetary requirements live digitally, and prospective lenders can commit to such funding.
P2P platforms conduct thorough borrower assessment to ensure minimum risk for lenders. However, it may involve incurring considerable cost to attract investors. The period required to raise capital is also uncertain in this case.
KredX, India’s leading integrated cash flow solutions provider, offers cash advance conveniently against a business’s invoice value within 24 – 72 hours*. You can address your business’s emergency financial requirements with ease via our invoice discounting service.
Nevertheless, opting for the right sources of finance on time ensures effective business growth and accelerated profits.