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5 Top Tips to Use Chit Fund Investments to Finance Your Small Business?

Small and medium enterprises in India often face unique business challenges. Changing market dynamics, rising cost of labour or finding a reliable source of finance are some of the difficulties small businesses face. They need innovative long-term solutions for such problems. The pandemic has wrecked much havoc for small businesses nationwide in recent times. Small business owners are looking for new avenues of finance to tide them over the business expenses and support business growth.

Many small business owners may not be aware, but investing in chit fund schemes can benefit their business. Investing in an online chit fund can help you access affordable finance within a month or even a few days in an emergency. Chit funds generate money with little effort and capital. Compared to other sources of business finance, you may find chit funds in India more convenient and reliable.

Various Sources of Finance for Small Business Expenses

  • Loan – A common prospect for finance in business are banks, which offer short term and long-term loans at varied rates of interest to small and medium enterprises in India.
  • Government Schemes – The government of India often launches financing schemes for small businesses. Talk to your bank to find some good schemes that allow women entrepreneurs, rural businesses, and many others to provide affordable finance for small and medium enterprises.
  • Chit Funds – Chit fund companies allow small businesses to save and borrow simultaneously. Members contribute some money in return for an accumulated sum at the end of the tenure.

What is a Chit Fund?

A chit fund scheme is run by a foreman who enters into an agreement with a specified number of people (members) who contribute a pre-decided sum of money every month. The money pooled with the foreman is then auctioned off to the member who bids for the highest discount.

The discounted amount is distributed among the remaining members after subtracting the foreman’s commission. Chit funds and online chit funds are regulated by state governments and should be registered to be legal.

How Do Chit Funds Work?

A chit fund scheme has a predetermined value and duration. Every chit fund scheme admits a limited number of members who contribute a certain sum of money every month to the ‘pot’. The collected money in the pot is then auctioned off every month. The highest bidder wins the pot. The bid amount or the ‘discount’ is deducted, and the pool remaining money is given to the winner. The discount amount is then distributed among all the chit fund members. This amount is known as the dividend.

How Can Chit Funds Help Finance Small Businesses?

  1. Saving – Chit fund schemes allow small business owners to save consistently. When you pay the monthly instalment, it holds, and when you win the auction, it borrows against future savings.
  2. Investing – Small businesses usually have the liquidity to invest in chit funds to earn profitable returns regularly. Some chit funds in India allow traders and small companies to make daily contributions instead of monthly to align the investment cycle with their income cycle.
  3. Emergency Fund – Think of a chit fund investment as an emergency fund for your crisis. Whenever you need extra finance, you can bid in the auction that month to receive a loan out of your funds. After getting the loan, you can continue to make contributions every month and repay the loan.
  4. Bill Payments – Investing in a chit fund can help you save enough to make your bill payments and vendor payments on time. You will no longer be dependent on cash inflows to pay bills.
  5. Renovation – If your office or shop requires renovation, you can avail the funds by bidding in the auction at your chit fund. You can complete the renovation without waiting for your savings to grow.

Advantages of Investing in Chit Funds

There are various advantages of investing in chit funds, especially if you are a small business owner. Chit funds work as tools of saving and borrowing at the same time. They offer the flexibility of affordable loans without collateral or security. The dividends earned every month on the chit funds are neither taxable nor tax-deductible. Chit fund schemes are easy to join and avail.

In recent years, chit fund investments have proven helpful to small and medium business owners. The government imposes strict rules to ensure fair practices and lawful functioning in registered Chit funds. Small business owners should choose from recognized and registered chit fund companies only.

Author Bio:

Aatish Khanna works with the Content Marketing team at Money Club – a digital chit fund platform that makes saving, borrowing, and investing your money more efficient. He writes on topics to help his readers understand processes so they can make better financial decisions. He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.

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