8 Sources of Finance for Small-Scale Industries

Introduction

Finding financing for your business is one of the most important things you can do to ensure its success. There are a wide variety of ways in which you can find financing for your small-scale industry, and this is just one aspect of the overall financial management of your business. Small-scale industries need both long-term and short-term credit. The source of finance is essential for the survival, development, and overall growth of the industry. There are a wide variety of sources of finance, including personal investment, love money, venture capital, angel funding, crowdfunding, business incubators, etc. These sources are useful under various circumstances. They are classified based on time period, ownership and control, and their source of generation. Sources of finance are the most researched area, especially for startup entrepreneurs. In this article, we will explore the top 8 sources of finance for small-scale industries in India.

What is a Small-Scale Industry?

Small-scale industries are those industries wherein manufacturing, production, and servicing processes are carried out on a micro-scale. The majority of the investments in these industries are made in plants and machinery. Small-scale industries help to improve the quality of life of people living in rural areas and ensure an equitable distribution of wealth, income, and standard of living.

Investment in the service small-scale industry:

For service industries,

• Micro Enterprises: Up to Rs. 10,00,000
• Small Enterprises: More than Rs. 10,00,000 up to Rs. 2,00,00,000
• Medium Enterprises: More than Rs. 2,00,00,000 up to Rs. 5,00,00,000

Examples of Small-Scale Industries:

• Bakeries
• School stationeries
• Paper Bags
• Leather belt
• Coconut oil making
• Rice mill
• Toys making
• Detergent powder-making
• Xerox and printing
• Incense stick manufacturing industry
• Paper plate manufacturing industry

Which are the Top 8 Sources of Finance for Small-scale Industry?

The top 8 sources of finance for small-scale industries include:

1. Personal Investment:

Personal investment is one of the most common and implemented sources used by small entrepreneurs to establish their small-scale industries. It involves investing one’s own money, either in cash or in assets, to prove a long-term commitment to the project. With the help of personal investment, various business needs, such as expansion, equipment purchases, and working capital, can be fulfilled.

Affordable business ideas for personal investments:

• Dropshipping Business
• Tutoring services
• Real estate agent
• Mobile food carts
• Hauling business
• Bakery shop

2. Love money:

The term ‘love money” is not often familiar but is widely used for raising funds in the corporate world. The money borrowed from a spouse, parents, other family members, or friends for business use is known as ‘love money’. A banker considers this as ‘patient capital’, which is cash that will be repaid to the respective ones as the business increases its profit.

When borrowing money, one should be aware that:

• Family and friends usually do not have such a large amount for investment.
• A business relationship with a family member or a friend is not something to be taken lightly.
• It is usually advisable not to combine professional and personal life.

3. Venture capital:

The first thing to remember is that this type of funding is not for everyone. Right from the beginning, one should be aware that venture capitalists are looking for tech-driven businesses and high-growth companies in industries like IT, communications, and biotech. Venture capitalists provide capital to your business to help it execute a high-potential but high-risk project. This means that you give up some of your ownership or equity to an outside party. Venture capitalists expect a high return on investment, which is often achieved when your business begins to sell shares to the market. Make sure that you are working with investors who have relevant experience and expertise in your industry.

4. Angels:

Angels are usually high-net-worth individuals or retired corporate leaders who make direct investments in small companies owned and managed by other companies. They are often industry leaders who bring their expertise and network to the table, as well as their technical and managerial expertise. Angel investors typically invest between ₹20,84,825 ($25,000) and ₹83,39,300 ($100,000) in the early stages of a business, while institutional venture capitalists typically invest between ₹8,33,85,150($1 million) and ₹41,69,25,750($5 million).

5. Crowdfunding:

Crowdfunding is a type of funding source wherein businesses solicit contributions from the general public, typically in exchange for shares in the company. This typically involves a Pvt ltd Company soliciting small contributions from a large number of people. This is different from angel or venture capital fundraising, where a small group of investors invest large amounts of money into your business.

There are various forms of crowdfunding, including:

6. Business Incubators:

Business incubators (also known as “accelerators”) typically target the high-tech industry by supporting startups in their early stages of growth. Local economic development incubators (also called “local economic development” or “EED”) focus on areas such as creating jobs, revitalizing neighborhoods, and providing hosting and sharing services.

Most incubators will partner with early-stage businesses and other start-ups to share space, management, and technology. An incubator may share its labs with a new business so that it can develop and validate its products at a lower cost before going into production. The incubation period can last anywhere from one to two years. After the product is fully developed, the company typically leaves the incubator and enters its industrial production phase, leaving the incubator behind.

7. Grants and subsidies:

A grant is a conditional financial contribution that your business is not required to pay back. However, you are legally obligated to use it in accordance with the terms and conditions of the grant; otherwise, you may be required to pay it back. Once you’ve received funding from a single government source, it’s not unusual to receive additional funding from that source if you qualify for a program.

Criteria for obtaining a grant:

As a general rule, you’ll need to:

• Project description
• Pros and cons of the project
• Project report and budget for the project
• Project team and sources

8. Loans:

Lending is the most popular method of financing for small and medium-sized businesses. Notably, different lenders offer different benefits, such as personalized service or a tailored repayment plan. Therefore, it’s wise to compare different lenders and find the one that best suits your needs.

For example: Bank loans, financial institutions, money lenders, loans from the government, etc.

“Discover how to get money for your small business! Learn about different ways to finance your growth, like loans and grants. Find out how MSME registration online can help you access these funds easily. Get ready for success in your small business journey!”

Conclusion

In conclusion, finding funding for small-scale industries is essential for their development and sustainability. Entrepreneurs have a variety of funding options available to them, such as personal investments, love funds, venture capital funds, angel funds, crowdfunding funds, business incubator funds, grants, and loans. Knowing the advantages and disadvantages of each of these sources allows for strategic financial planning to ensure the success of small-scale industries in India’s vibrant business environment.