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Things you need to know about small business funding

18, September 2017 | Vikash Singh

However, the fact is that startups need more fund support, simply because they not only need the funds for the smooth functioning of business activities, but also for expanding their business from time to time. Over the past few decades, startups or small companies have transitioned smoothly from using banks as their major funding source to other popular sources such as IPO, Venture Capital (VC) funds, and Private Equity (PE) funds. This is largely due to the numerous formalities and mandatory paperwork involved in bank financing. 

Here are the key things you need to know about funding for small businesses, especially in terms of popular options available:

Initial Public Offering (IPO)

IPO is one of the best ways in which a startup or a small company can generate funds for its business expansion or product diversification. It's August, thus, it's not only raining everywhere in India, but it's also raining IPOs in the literal sense of the term. Yes, many private and small companies have successfully floated their IPOs. Small companies can offer a share in the company's business to the investors, the public at large, up to the extent of the shares subscribed by an investor through the IPO. Small business can easily list their company on noted stock exchanges such as BSE Sensex and NSE by floating an IPO.Small businesses can use the funds procured through an IPO for setting up more manufacturing units, diversifying product/business portfolio, reduce existing debt, or enter new markets. This would help these small businesses and startups to improve profitability, which in turn would make the investors happy through stronger long-term returns in the form of dividends.Therefore, IPO becomes an effective way for small businesses and startups to generate capital.  

Venture Capital (VC) funding

A 'high risk, high return' investment class, VC funds are an effective funding mechanism for small businesses and startups. In return for pumping funds, VC fund pickup private equity stake in numerous small businesses and startups that possess strong potential. Therefore, VC funds are an effective source of equity funding for startups and small business, since they help these small businesses raise funds at key moments, enabling them to execute their business strategies effectively and at the right time.

Private Equity (PE) funding

PE funds invest their money in small businesses and startups with bright business potential, either from different industries or in specific industries, making them an effective funding mechanism. PE funds are a company's friend in good and bad-weather. Thus, they will always help small companies and startups see through tough business phases to become profitable again.This makes PE funds an attractive investment option.

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