According to a recent study, over 90% of newly started businesses or startups fail during the first year of operation.
Low funding becomes a common cause.
Money is the lifeline of any business. The long painstaking yet exciting journey from idea to revenue-generating business requires a fuel called capital.
This is why at almost every stage of business, entrepreneurs ask themselves – How do I finance my startup?
Now, when you will need the money, it largely depends on the character and type of business.
But once you realize the need for fundraising, below are the various sources of finance available.
Here is a comprehensive guide that lists 7 funding options for startups that can help you raise capital for your business.
Some of these funding options are for Indian businesses, however, similar options are available in many countries.
1. Self-funding your startup business:
Self-funding, is an effective method of startup financing, especially when you are starting your business.
First-time entrepreneurs have trouble getting funding without first showing some traction and a plan for potential success.
You can invest from your own savings or ask your family and friends to contribute.
It will be easier to raise due to fewer formalities/compliances as well as lower cost of mobilization. In most situations, family and friends are flexible about the interest rate.
Self-funding or bootstrapping should be considered as the first funding option due to its advantages.
When you have your money, you are bound by the business.
At a later stage, investors see this as a good point. But it is suitable only if the initial requirement is very less.
Some businesses require funds from day one and bootstrapping may not be a good option for such businesses.
2. Get angel investment for your startup:
Angel investors are individuals who have extra cash and are eager to invest in upcoming startups. They also work in groups to network to collectively examine proposals before investing. They can provide capital as well as advice or advice.
Angel investors have helped start several major companies, including Google, Yahoo, and Alibaba. This alternative form of investment typically occurs in the early stages of a company’s growth, with investors expecting up to 30% equity. They like to take more risks in investments for higher returns.
Angel investing as a funding option also has its drawbacks. Angel investors tend to invest less amount than venture capitalists (covered in the next point).
Here is a list of popular angel investors in India :
See also a list of individual angel investors in India, some of these active angel investors have invested in several successful startups.
3. Crowdfunding as a Funding Option:
Crowdfunding is one of the newer ways to fund a startup that is gaining a lot of popularity recently. It is like taking loans, pre-order, contributions, or investments from more than one person at the same time.
How Crowdfunding Works – An entrepreneur will give a detailed description of his business on the crowdfunding platform.
He will mention his business goals, profit-making plans, how much money he needs and for what reasons, etc and then the consumer can read about the business and give money if he likes the idea.
Payers will make a pledge online with a promise to buy or donate the product in advance.
Anyone can contribute money to help a business they truly believe in.
Why you should consider crowdfunding as a funding option for your business:
The best part about crowdfunding is that it can also generate interest and hence helps in financing as well as the marketing of the product.
It’s also a boon if you’re not sure whether the product you’re working on will have any demand.
This process can cut off professional investors and brokers by putting money in the hands of the common people.
It may also attract venture-capital investment down the line if the company has a particularly successful campaign.
Keep in mind that crowdfunding is a competitive place to make money, so that your business will not be completely solid and not only attract the attention of the average customer through descriptions and some images but also keep your business alive. Must be kept. Crowds at work can’t get funding. Done.
4. Raise funds through bank loans:
Generally, banks are the first place entrepreneurs think of funding.
The bank offers two types of financing for businesses.
One is a working capital loan and the other is funding. Working capital debt is the debt that is needed to run a full cycle of revenue-generating operations, and the limit is usually fixed by mortgaging stock and debtors.
Financing from banks would involve the usual process of sharing business plan and appraisal details along with project reports, based on which loans are sanctioned.
Almost every bank in India provides SME finance through various programs.
For example, major Indian banks – Bank of Baroda, HDFC, ICICI, and Axis banks have more than 7-8 different options for offering collateral-free business loans.
Please refer to the respective bank sites for more details.
Know how to get a working capital loan in India.
5. Get venture capital for your business:
This is where you make big bets. Venture capitals are professionally managed funds that invest in companies with great potential.
They generally invest in a business against equity and exit when an IPO or acquisition takes place.
VCs provide expertise, consultancy and act as a litmus test of where the organization is going, evaluating business from the standpoint of sustainability and scalability.
A venture capital investment may be suitable for small businesses that are beyond the startup stage and are already generating revenue.
Fast-growing companies like Flipkart, Uber, etc already with exit strategies can leverage up to tens of millions of dollars which can be used to invest, network, and grow their company rapidly.
However, there are some drawbacks to venture capitalists as a funding option.
VCs have a short lease when it comes to company loyalty and often wants to recover their investment within a time window of three to five years.
If you have a product that is taking longer to market than that, venture-capital investors may not be very interested in you.
They usually look for bigger opportunities that are a bit more stable, companies that have a strong team of people and good traction.
You need to be flexible with your business and sometimes give up a little too much control, so if you’re not interested in consulting or compromising a lot, this may not be the best option for you.
6. Get business loans from microfinance providers or NBFCs
What do you do when you can’t qualify for a bank loan? Still an option.
Microfinance is basically access to financial services for people who would not have access to traditional banking services.
It is becoming increasingly popular for people whose needs are limited and credit ratings are not preferred by banks.
Similarly, NBFCs are non-banking financial corporations that provide banking services without meeting the legal requirements/definitions of a bank.
For more information see the Microfinance Institute Network. Here is a list of top microfinance companies in India.
At Profitbook, we partnered with some of India’s top lenders to help you get funded.
7. Government programs that provide startup capital:
The Government of India has launched a startup fund of 10,000 crores in the Union Budget 2014-15 to improve the startup ecosystem in India.
To promote innovative product companies, the government has launched the ‘Bank of Ideas and Innovation’ program.
The government-backed ‘Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA)’ starts with an initial corpus of Rs. 20,000 crore to benefit about 10 lakh SMEs.
You have to submit your business plan and once approved, the loan is approved. You get a Mudra card, which is like a credit card, which you can use to buy raw materials, other expenses, etc. There are three categories of loans available under the Shishu, Kishor, and Tarun promising schemes. Learn more about MUDRA.
Also, various states have come up with various programs like Kerala State Self-Entrepreneur Development Mission (KSSEDM), Maharashtra Entrepreneurship Development Center, Rajasthan Startup Utsav etc. to encourage small businesses.
SIDBI – Small Industries Development Bank of India also provides business loans to the MSME sector.
In the US, there is a small business lending fund and a dedicated portal for government grants available to local businesses.
A government grant as a financial option can be one of the best if you comply with the eligibility criteria. You just need to make yourself aware of various government initiatives.
Read about the Startup India Plan of the Government of India.
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