Borrowing for business : 1. Basics to understand

There are many entrepreneurs who have ideas and passion for pursuing their dreams. Many are successful, few struggle and few create history.

What are the challenges they face in their starting stage?

• Getting finance
• How to convert their ideas to a marketable product or service
• Marketing their product or service

I have worked all through my life starting as finance head, borrowing funds for my organization or for my company's clients. With that experience, I am lining out few tips to those who are looking to get finance from Banks, Financial Institutions or Non Banking Financial Companies (NBFC).

As a person, all we know is that we need money - in any form to start the business, run the business etc., That is the focus and that should be the focus.

At this juncture, the entrepreneur overlooks certain things and end up focusing on running after lenders and meeting regulatory compliance. I will cover the regulatory compliance separately.

Let us look at a situation. You are a successful entrepreneur and running a successful profitable business in consumer durable. I am a rank holder in my MBA from a decent business school and started my trading business in consumer durable.

I approach you and request you to give me your products, which I can sell in market and pay you after 30 days. I show all my educational credentials and prizes that I have won in marketing competitions. 

Would you:

1. Encourage me by giving your products to me on credit for 30 days; OR
2. Ask me to get a surety or cash down to take the products.

Friends, this is exactly the banks and others also do. We need to understand that they are not NGOs and they also run the business for profits. Each banks way of functioning will be slightly different, though they are governed by RBI and Banking Regulations Act.

That said, there are ways to get seed capital, personal loans that one can take to run the initial set up. If you do not have security to offer, you can look at some financial partner to start with, giving an exit option.

Some of the entrepreneurs experience on their firs 3 years of operations;

• Start with smaller operations with tight finance
• Borrow money by pledging idle assets like gold
• Work for few years to gain experience and save money - during this time do the groundwork for the dream project
• Crowd funding
• Financial partner with loan / equity option after 3 years
• Equipment financing
• Equipment leasing

There are many ways one can get funding, if you have a good viable business proposal. Remember, no one will ignore an opportunity where they can earn more.

In this series, next I will be writing on what type of lenders and what type of financing available, the tips to get loans - what the bankers look for.

Happy weekend.