According to a recent study, over 94% of new businesses fail during the first year of operation. Lack of funding turns to be one of the common reasons. Money is the bloodline of any business. The long painstaking yet exciting journey from the idea to revenue-generating business needs a fuel named capital. That’s why, at almost every stage of the business, entrepreneurs find themselves asking – How do I finance my startup?
Now, when would you require funding depends largely on the nature and type of the business. But once you have realized the need for fundraising, below are some of the different sources of finance available.
Here is a comprehensive guide that lists 10 funding options for startups that will help you raise capital for your business. Some of these funding options are for Indian business, however, similar alternatives are available in different countries.
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1) Bootstrapping your startup business:
Self-funding, also known as bootstrapping, is an effective way of startup financing, especially when you are just starting your business. First-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success. You can invest from your own savings or can get your family and friends to contribute. This will be easy to raise due to fewer formalities/compliances, plus fewer costs of raising. In most situations, family and friends are flexible with the interest rate.
Self-funding or bootstrapping should be considered as a first funding option because of its advantages. When you have your own money, you are tied to the business. At a later stage, investors consider this as a good point. But this is suitable only if the initial requirement is small. Some businesses need money right from day-1 and for such businesses, bootstrapping may not be a good option.
Bootstrapping is also about stretching resources-both financial and otherwise – as far as they can.
2) Crowdfunding As A Funding Option:
Crowdfunding is one of the newer ways of funding a startup that has been gaining a lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time.
This is how crowdfunding works – An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much funding he needs and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.
Why you should consider Crowdfunding as a funding option for your business:
The best thing about crowdfunding is that it can also generate interest and hence helps in marketing the product alongside financing. It is also a boon if you do not sue if there will be any demand for the product you are working on. This process can cut out professional investors and brokers by putting funding in the hands of common people. It also might attract venture-capital investment down the line if a company has a particularly successful campaign.
Also keep in mind that crowdfunding is a competitive place to earn funding, so unless your business is absolutely rock solid and can gain the attention of the average consumers through just a description and some images online, you may not find crowdfunding to work for you in the end.
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3) Get Angel Investment In Your Startup:
Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.
Angel investors have helped to start up many prominent companies, including Google, Yahoo, and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting an up to 30% equity. They prefer to take more risks in investment for higher returns.
Angel Investment as a funding option has its shortcomings too. Angel investors invest lesser amounts than venture capitalists (covered in the next point).
Here is a list of popular Angel Investors in India – Indian Angel Network, Mumbai Angels, Hyderabad Angels.
Also, check out the list of individual Angel Investors in India, some of these active angel investors have invested in many successful startups.
4) Get Venture Capital For Your Business:
This is where you make the big bets. Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organization is going, evaluating the business from the sustainability and scalability point of view.
A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues. Fast-growth companies like Flipkart, Uber, etc with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company quickly.
However, there are a few downsides to Venture Capitalists as a funding option. VCs have a short leash when it comes to company loyalty and often look to recover their investment within a three- to the five-year time window. If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.
They typically look for larger opportunities that are a little bit more stable, companies having a strong team of people and good traction. You also have to be flexible with your business and sometimes give up a little bit more control, so if you’re not interested in too much mentorship or compromise, this might not be your best option.
5) Get Funding From Business Incubators & Accelerators:
Early-stage businesses can consider Incubator and Accelerator programs as a funding option. Found in almost every major city, these programs assist hundreds of startup businesses every year.
Though used interchangeably, there are few fundamental differences between the two terms. Incubators are like a parent to a child, who nurture the business providing shelter tools and training and network to a business. Accelerators so more or less the same thing, but an incubator helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap.
These programs normally run for 4-8 months and require a time commitment from the business owners. You will also be able to make good connections with mentors, investors and other fellow startups using this platform.
In the US, companies like Dropbox and Airbnb started with an accelerator – Y Combinator.
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6) Raise Funds By Winning Contests:
An increase in the number of contests has tremendously helped to maximize the opportunities for fundraising. It encourages entrepreneurs with business ideas to set up their own businesses. In such competitions, you either have to build a product or prepare a business plan.
Winning these competitions can also get you some media coverage. We, at ProfitBooks, benefitted a lot when we were regional finalists in Microsoft BizSparks in 2013 and won Hot100 Startup Award in 2014.
You need to make your project stand out in order to improve your success in these contests. You can either present your idea in person or pitch it through a business plan. It should be comprehensive enough to convince anyone that your idea is worth investing in.
7) Raise Money Through Bank Loans:
Normally, banks are the first place that entrepreneurs go when thinking about funding.
The bank provides two kinds of financing for businesses. One is a working capital loan, and the other is funding. Working Capital loan is the loan required to run one complete cycle of revenue-generating operations, and the limit is usually decided by hypothecating stocks and debtors. Funding from the bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned.
Almost every bank in India offers SME finance through various programs. For instance, leading Indian banks – Bank Of Baroda, HDFC, ICICIand Axis banks have more than 7-8 different options to offer collateral-free business loans. Check out the respective bank sites for more details.
8) Get Business Loans From Microfinance Providers or NBFCs
What do you do when you can’t qualify for a bank loan? There is still an option. Microfinance is basically access to financial services to those who would not have access to conventional banking services. It is increasingly becoming popular for those whose requirements are limited and credit ratings not favored by the bank.
9) Govt Programs That Offer Startup Capital:
The Government of India has launched 10,000 Crore Startup Fund in Union budget 2014-15 to improve the startup ecosystem in India. In order to boost innovative product companies, the Government has launched the ‘Bank Of Ideas and Innovations’ program.
Government-backed ‘Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA)‘ starts with an initial corpus of Rs. 20,000 crore to extend benefits to around 10 lakhs SMEs. You are supposed to submit your business plan and once approved, the loan gets sanctioned. You get a MUDRA Card, which is like a credit card, which you can use to purchase raw materials, other expenses, etc. Shishu, Kishor, and Tarun are three categories of loans available under the promising scheme. Learn more about MUDRA.
SIDBI – Small Industries Development Bank Of India also offers business loans to the MSME sector.
If you comply with the eligibility criteria, Government grants as a funding option could be one of the best. You just need to make yourself aware of the various Government initiatives.
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10) Quick Ways To Raise Money For Your Business
There are a few more ways to raise funds for your business. However, these might not work for everyone. Still, check them out if you need quick funds.
Product Pre-sale: Selling your products before they launch is an often-overlooked and highly effective way to raise the money needed for financing your business. Remember how Apple & Samsung start pre-orders of their products well ahead of the official launch? It’s a great way to improve cashflow and prepare yourself for consumer demand.
Selling Assets: This might sound like a tough step to take but it can help you meet your short term fund requirements. Once you overcome the crisis situation, you can again buy back the assets.
Credit Cards: Business credit cards are among the most readily available ways to finance a startup and can be a quick way to get instant money. If you are a new business and don’t have tons of expenses, you can use a credit card and keep paying the minimum payment. However, keep in mind that the interest rates and costs on the cards can build very quickly, and carrying that debt can be detrimental to a business owner’s credit.
If you want to grow really fast, you probably need outside sources of capital. If you bootstrap and remain without external funding for too long, you may be unable to take advantage of market opportunities.
While the plethora of lending options may make it easier than ever to get started, responsible business owners should ask themselves how much financial assistance they really need.
Now the big question is – How do you prepare your business for fundraising? It’s better to start from the beginning with good corporate governance as it might get hard to go back later and try to exert fiscal discipline. To address these concerns, invest in good accounting software and keep your finances in order.