1) Determine how much you’ll need. Develop a good business plan or detailed project report- A complete reference book covering details about the project & promoters.
2) One has to be very careful while borrowing. Foremost is the purpose of borrowing and its repayment and ensuring that borrowing is just enough. Therefore, one must and should avoid the temptation to borrow more without talking about debt serviceability. Equally, one must not start any new project without proper financial closure, as unfinished projects(due to under-financing) will have serious repercussions.
3) Don’t be too conservative when estimating your financing requirements. For example, some experts recommend adding 10 percent to your estimate to cover unexpected needs.
4) Weigh all your financing alternatives. Personal savings, loans from family or friends, credit cards, commercial bank loans, NBFCs, Online lenders, Crowdfunding, vendor financing, factoring or private investors. Each choice has pros and cons; think them through carefully.
5) Choice between debt & equity has different costs and benefits. Debt is cheaper but riskier, whereas equity is costlier but absorbs risk. Equity investors seek the highest governance standards, whereas debt providers seek collateral security. The context of debt or equity is substantially different and cannot be compared.
6) Structure of funding: It is a poorly understood aspect of fundraising among SMEs. While raising debt, one should be careful about tenure, repayment schedule, cost, etc., about the cash flow structure of the business. There are many instances of financing long-term investments with short-term working capital, which is the cause of many companies suffering in the long run.
7) Arrange for credit sources in advance. Don’t wait until the last minute.
