How to use Chit Funds to raise capital for your business

March 24, 2023March 24, 2023 Anuradha C Chit funds

As soon as a new entrepreneur comes up with an attractive product idea to start a new business, the first question that pops in his mind is “What do I do for funding?” Most SME entrepreneurs use their personal finances to fund their ventures with seed capital (Initial investment to kick start your business). Once the business takes off, they are ready to seek additional funding to scale their business.

The traditional methods for raising capital for a new business are:

Taking bank loans
Seeking venture capital from Private Equity funds
Listing the company on the stock market through the IPO route
Taking on new partners who can pool in their capital

There are pros and cons to each of these funding routes.

Bank/NBFC loans are the most obvious choice. They may be an easy funding route if you have a robust product idea and are able to bring in steady revenues. But they bring in a heavy burden of debt on the company’s finances when the business is lean. The debt weighs down heavily on the company and often results in closing down of the operations.

Venture capital, selling stake to a partner and stock market listing are possible options for scaling your business. But they involve a lot of procedural complexities and also result in loss of control over the decision-making powers of the promoters. The investors will become key stakeholders and you would have to accommodate their wishes.

Now let’s explore another alternative funding route for raising capital for your business – Chit Funds.

There are several aspects to finance management of a business entity – initial funding, working capital, purchase of assets and machinery, tax considerations, salary payments, raw materials purchase and so on. Though the detailed financial planning may vary depending on the nature of business, these are common aspects that every entrepreneur would need to consider.

A typical growing business will have a clear expansion plan mapped out for the short to medium term. Short term financial planning is to arrange working capital for day to day operations. For expansion goals over the 2-5 year horizon, the planning needs to be done right now. For both short and medium term financing, chit funds are suitable. Let’s see how.

Chit funds for working capital and short-term financial needs: In the present economic situation across the world, most business surveys point out that a working capital crunch is the biggest reason for SMEs to fail, even though they have a reasonably healthy order position. The fixed commitments such as salaries, bill payments, loan EMIs or tax obligations are to be mandatorily met.

Chit funds can come to your rescue here. For raising working capital, if you are used to availing an overdraft, a chit fund would work much better. That is because the repayment you make every month only covers the interest when you avail of debt. Whereas with a chit fund scheme, even if you pull out the entire amount early, your monthly payments cover both the principal and interest. Thus leaving you debt free at the end of the tenure.

Chit funds for 2-5 year expansion plans: In order to meet medium term expansion goals 2-5 years ahead, you can consider routing a part of your profits earned today, into a chit fund scheme. The lump sum will be at your disposal when you need the capital 2 years ahead. For longer tenure plans, you can reinvest the amount for successive terms.

Your money would earn a healthy 7-9% return on investment when you retain the money without withdrawing till the end of the tenure. Anywhere in the middle of your investment tenure, if you are in a financial emergency, you can withdraw your prize money with minimal documentation and continue to pay your monthly instalments. No heavy interest burden such as in credit instruments like seeking a loan.

Shanthala Chits has been in the business of chit funds for over 2 decades now. We are a Government approved chit fund company with a 25 year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, Government of Karnataka. We are one of the most popular chit fund houses based out of Bengaluru, known for our customer satisfaction and secure investments.

You can pick a chit scheme with a low monthly instalment for working capital needs. And opt for a larger prize money scheme for raising capital for expansion plans. Our Chit schemes range from a monthly contribution of Rs 6000 to Rs 1,00,000 to suit every budget. Our chit schemes are for a tenure of 25 Months.

Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.

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Anuradha C

Anuradha is a freelance writer cum corporate trainer in the IT/telecom domain with over 18 years experience. She served in senior technical and management positions in Huawei and TCS for 10+ years. Then gave up the traditional corporate ladder to go solo - in order to escape horrendous city traffic and to be at her own boss!