Understanding Different Kinds of Business Loan Lenders

Having funds in business is always necessary, whether it is self-funded or provided by another person or entity. It may be required at the time of establishment, expansion, renovation or simply for carrying out operations. In the absence of funds in the business, businessmen opt for loans.

Business loans are offered to businesses in their nascent stage as well as for businesses which have been already established for some years. Loans allow businesses to fund their operations and compete with their competitors. But, where do businesses get these loans from?

There are different types of business loan providers in India which lend loans to businesses. Here is a description of such lenders:

1. Friends and Family

Family run businesses are typically traditional in nature. Friends and family might provide financial support from time to time. Research says that most businesses start up with funds sourced by the entrepreneur or from friends and family. Most start-ups turn to their friends and family, long before contemplating a loan.

Thus, friends and family do form an integral part of business funding, at least in their nascent stages. In return, those providing funds are either offered equity in the company or are paid interest for the funds provided.

2. Banks

The next most popular source of funds is banks. Most private and public sector banks offer attractive commercial loans to businesses of all types.

These loans can either be short-term or long-term in nature. While long term loans can even be for a period of 20 years, short term loans range in between 6 months to 3 years. Short term business loans in India are usually small ticket loans and can be unsecured or collateral free. However, banks might require extensive business loan documents, depending on the nature of the business and type of loan request.

3. Government

The Government offers a variety of loan schemes. Several measures have been taken to make credit more easily accessible to Micro, Small and Medium Enterprises (MSMEs). This includes lowering interest rates to encourage MSMEs to avail loans. Even social welfare loans and grants are available from the Government at very competitive rates. These initiatives taken by the Government are aimed at developing the Indian economy by enhancing MSME production and boosting the industrial growth of the country.

For example, the Government’s latest business financing scheme called MUDRA (Pradhan Mantri Micro Units Development and Refinance Agency Limited), is a scheme to help Small and Medium Enterprises (SMEs) by providing them with loans to establish and start their business. There are other schemes as well, both at the State Government level and at the Central Government level. Their ulterior motive is to boost the MSME segment as a whole.

4. Non-Banking Financial Corporations

Similar to banks, NBFCs also offer a variety of long-term and short term loans. In fact, they may offer additional benefits, better service and even cheaper rates than what the banks can offer. This makes NBFCs quite popular. Their lending services are often accompanied with advisory services as well.

Even their documentation requirements are lower and less stringent than that of banks. Thus, many businesses opt for a sme finance from NBFCs.

5. Angel Investors

They simply are individuals, who fund certain businesses if they are convinced with the business idea. It means, if you were to get angel funding into your business, the investor would be prepared to invest a large sum of money to mobilise the startup, if they believe that the startup has potential to make it big.

Angel investors can either be an individual or a group of individuals established as a company or an agency. New businesses can approach such angel investors to invest in their ideas and fund their start-ups. In return, the businesses promise a part of their ownership to the angel investors and sometimes also offer them to be a part of the management team.

The benefit of borrowing from angel investors is not only funding, but the advisory function that these investors offer. Since these investors have invested in your business, they would leave no stone unturned to make your business a successful venture. Since, angel investors invest in an idea and they believe in the potential of the business, they also could mentor you and help you become successful.

6. Venture Capitalists

A similar concept along the lines of angel investors is Venture Capitalists or VCs. VCs are also individuals or agencies, who provide funding to start-ups in order to establish themselves but they are usually of a much higher ticket size. VCs provide funds and help you run the business to its optimal potential. They also help by mentoring the businessmen and sharing advise on business matters. VCs get on-board with a profit sharing ratio as well as an exit plan in 3-5 years’ time.

Thus, they often exit the businesses once it stabilises or it launches an IPO and goes public by offering its shares for subscription.

7. Business Incubators and Business Accelerators

Business incubators and accelerators are again a comparatively newer concept in the business funding space. Apart from providing funding to start-ups, they also provide the required knowledge, mentoring and network to help businesses expand and grow. They work as a catalyst to the business and help in its exponential growth.

This concept is relatively new to many businesses in India, but is fast gaining recognition and popularity.

8. Crowdfunding

According to this concept, multiple individuals can fund an existing business or a startup idea. Friends, family, customers and other known or unknown associates can contribute to the business capital if they find the business idea viable. The potential for growth and profitability of the business are the primary yardsticks for the success of crowdfunding lenders considering crowdfunding. With this form of funding, the ticket size of the funds is usually not very high.

Thus, after understanding the various types of funds that your business can avail, you can pick and choose which one you may want to opt for.

Ankit Shrivastva is a blogger with an experience 8 years and worked for top organisation of India.