1. Determine how much you’ll need. Develop a good business plan or detailed project report- A complete reference book covering details about project & promoters.
2. One has to be very careful while borrowing. Foremost is the purpose of borrowing and its repayment and ensure that borrowing is just enough. One must and should avoid to the temptation to borrow more and without reference to 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. 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, Crowd funding, vendor financing, factoring or private investors. Each choice has pros and cons; think them through carefully.
5. Choice between debt & equity: Both have different costs and benefits. Debt is cheaper but riskier whereas equity is costlier but absorbs risk. Equity investors seek highest standards of governance 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 one of the poorly understood aspects in fund raising among SMEs. While raising debt one should be careful about tenure, repayment schedule, cost etc in relation to cash flow structure of the business. There are many instances of financing long term investments by short term working capital, which is the cause for many businesses suffer in the long run.
7. Arrange for credit sources in advance. Don’t wait until the last minute.