Financing one’s small business has always been the biggest challenge for any budding entrepreneur, and things have been especially tough under present conditions. Regulatory hassles, complicated application and qualifying procedures or inflexible interest rates often deter borrowing from the banking sector. Loans from banks or NBFCs for startups are very difficult to come by, as they usually require 3 years financial details of cash flows and profitability for eligibility.

A small business can opt for 2 kind of funding, debt or equity based. Both have their pros and cons and one of the most important decisions for any successful small business is to balance the mix. Angel Funders, consisting of select High Net-worth Individuals are a good bet but very hard to come by. Most usually prefer to make equity investments and are extremely choosy about the business in question. Venture Capitalists are a good source of seed money, but often put lot of conditionalities. Also, getting venture capitalists require lot of connection and solid business backgrounds. Venture Debt especially requires very high rates of returns and long term loans are not readily available.

A very popular development in the West has been the emergence of crowdfunding. Crowdfunding, or crowd sourcing is a collective effort by a group of individuals who pool in their resources behind a business venture. Crowdfunding depends heavily on the emergence of e-commerce and is facilitated by agencies via online websites. Crowdfunding has received a lot of importance with the recent Jumpstart Our Business Startups (JOBS) Act in the US aimed at encouraging funding of small business in USA via crowdfunding. P2P lending provides one of the best models of crowdfunding globally, and could well be the roadmap for crowdfunding in India as well.

While crowdfunding till date has been more popular in fields of independent film makers or music artists or social benefactor activities like relief funds, the model has quickly moved onto funding hardcore businesses as well. Crowdfunding helps get good advertisement along with funding, a much better market feedback about one’s business idea, a steady reckoning of where one stands vis-à-vis one’s peers and competitors, etc. It also allows for small investors to crowd in behind a potential business model which gives a broader source of funding which is easier to tap compared to one big lender.

Incidentally, community lending as followed by some of the traditional business communities in India are actually examples of crowdfunding. Come to think of it, the secret behind the success of the Reliance Group is initial crowdfunding by the community lenders to the visionary Dhirubhai Ambani in the early days. Emergence of P2P institutions like Faircent which have build their business model on community based lending, offer a modernized version of community lending in the form of the now globally popular crowdfunding for small businesses in India. For small businesses, this could well be the best option of raising funds in present times of crisis.