Small business accounting also includes factoring in sources of funds to your business. Here are five options that you can look at to obtain financing for your ventures, and where they should sit in your balance sheet.
Small business owners understand that getting capital to grow a business, manage operations and push through tough months is probably always a priority. Government figures indicate there are about 36 million small and medium-sized businesses (SMBs) in India and the competition to secure funds is fierce.
1. Small business loans
Loans from banks and non-banking financial companies (NBFCs) are a common and reliable way for businesses to raise capital. The advantage of taking a small business loan from a financial institution like a bank is that you can potentially enjoy low interest rates.
The downside, however, is the often-cumbersome paperwork and collateral you may have to provide. In addition, your credit history will play a role in determining what interest rates you can get, your eligibility for a line of credit and whether or not you are required to provide collateral.
Small business accounting tip: If your loan includes interest, then the only portion of loan repayments that qualifies as an expense to the business is the interest portion, not the principal.
2. Government Schemes
Government grants and schemes are a great way to raise capital, mainly due to the low interest rates they offer. Depending on your business and its requirements, you may be eligible for loans, credit or grants from government bodies such as SIDBI, NSIC or NABARD.
The Indian government has also recently launched an initiative called Mudra which works in collaboration with NBFCs and microfinance institutions to help small businesses secure loans.
Small business accounting tip: Government grants received by businesses are considered for inclusion in the profit and loss statement if there is reasonable assurance that they won’t be revoked.
3. Venture capitalists and angel investors
Another good way to raise capital for your business is through funding from venture capitalists (VCs) and angel investors. While securing funding from VCs and angel investors is challenging, it can be rewarding as they will not only invest capital in your enterprise, but they also offer years of business management expertise, which can help you flourish.
Small business accounting tip: Generally, investment funds are placed under liabilities in the profit and loss statement. However, if you are unsure, consult an accounting specialist to see how you should treat the investment funds you receive funding from a VC or private investor.
This is a relatively new way to raise capital. Crowdfunding platforms like Kickstarter or Indiegogo let you make a pitch for your business or idea and appeal to people to contribute funds. If your pitch is good and inspiring, then crowdfunding can be an easy, effective and hassle-free way to raise capital. The best part is you don’t need any collateral and the funds you raise are interest-free.
Small business accounting tip: Crowsourced funds should be reported in the same period of receipt if you are using accrual accounting.
5. Friends and family
Borrowing from friends and family is not a new concept for the Indian business owner. The advantages of such a loan would be low or no interest payments, flexible repayment options that work for you and no tedious paperwork, unlike when dealing with banks.
Small business accounting tip: Whether your loan comes with interest charges or not, it is recommended that you put the conditions of the loan down on paper, which can come in handy when filing taxes.
You will probably have to choose one or more of these options at different stages of your business’s life cycle. So make your job easier, keep your accounts in order, maintain a good credit history and do your best.