Raising the required fund for your business to the first step while executing the plan to build your business. As per a study, more than 90% of business ventures fail in their first year of operation. Any business idea which is made to generate sustainable profit always requires fuel which is technically called capital.
The source of capital required for the business depends upon its nature and type. Here are some different means through which you can fund your business. These means of finance are more or less uniform in nature in a globalized economic environment of financial sectors across the world. However, there may be certain similarly looking variations in specific regions.
- Fund yourself – This is a way to fund your business through your source. It is also bootstrapping your business. Fresh entrepreneurs or startups might fact difficult to raise finance due to a lack or absence of sufficient track record or exposure. You can invest out of your owned funds or borrowings from friends and relatives may be more flexible in the rate of interest. Therefore, the bootstrap funding should be considered as the first option due to these obvious advantages. Another major advantage of this option that you are taking absolute ownership of your business and remain tied up with it. This is very important from the point of view of the future prospective investors of your business. This method is more suitable if your initial requirement is small. But this option may not be suitable if your business needs money from day one.
- Crowdfunding – In this method, you take loans and pre-order contributions and investment from more than one source at the same time. Here the entrepreneur puts a detailed description of his business on a crowdfunding platform. The description will mention the business goals, ways of earning profit the business process and the details of how the funds are going to be applied in the business. The consumers can read about the details of the business through the crowdfunding platforms and can contribute towards the needed fund if the whole idea appeals to the product of your business.
The advantage of crowdfunding is that a lot of persons may take an interest in your business which may be helpful in the marketing of the products proposed in the business. Further, this process can bypass professional investors and other common people. It can also attract prospective venture capital investment through effective campaigning. However, crowdfunding is a competitive place to earn funding. It would work successfully only when your business plan is rock solid and gain the confidence of the average consumers first through description and visuals. Some popular crowdfunding platforms that are operating in India are Indigo go, wish berry, Ketto, fund lined and catapult, etc.
In US regions, they are Kickstarter, Rocket Hub, Dream funded one vest, and go fund me, etc.
- Angel Investment – Such investment comes from individuals with ample of cash and are keep to invest in startups. They normally work in groups or network which collectively screens the proposal before investing. They may also offer advice or mentoring in addition to the investment. The form of investing is generally made at the early stages of growth with an expectation to own at least up to 30% equity. They prefer to take more risks for a higher rate of return. The investment under this category is normally made in a lesser amount as compared to venture capital investment. The popular Angel investors in India are mainly Indian angel network, Mumbai Angels and Hyderabad Angels.
- Venture Capital – This covers relatively bigger areas of investment both in terms of size and magnitude. Venture capital funds are managed by professionals who invest in companies who have huge potential. They usually invest by buying equities and exit when there is a public issue of capital or acquisitions. Venture capitalists provide expertise, mentorship evaluating the business in term of its sustainability and scalability. This method of funding is more appropriate for small businesses that are already gone from the start-up phase and generating revenue and profits.
The venture capital is more suited to the companies who are stable having a sound management team and a good track record. Such investors may not prefer any long term association with the company and normally look to recover their investment witting 3 to 5 years time. If your business product has a longer life cycle, they may not be interested. Another point in this method, which is important, is that they may like to have more control over the company day to day operation and mentorship.
- Business incubators and accelerators – They are very popular funding programs for the early stages of the business. They have assisted hundreds of startups businesses every year and are found in every major city with some few interchangeabilities. There is some fundamental difference between incubators and accelerators. Incubators are like a parent to the child. They nurture the business providing space, Sheller, tools and their network to the business. Accelerators also perform the same role more or less, but they are more focus on further growth to take a giant leap. These programs run normally for 8 months and require a time commitment from business owners.
In this field, some popular names in India are amity innovation incubator, Angel Prime, Business Incubator, villager, startup village and T Labs.
- Raising funds by winning a contest – This types of fundraising, encourage entrepreneur with business ideas to set up their own businesses. For the competition participation, you have either to build a product or a viable business plan you will get media coverage when winning such competitions and contests. You need to present your business plan or project stand out among other participants of the contest. It should be comprehensive enough to convince anyone that your idea of business is worth investing in.
Some major startup contests in India are NASSCOM’S 10000 startups, Microsoft, big sparks, Conquest next big ideas son test, and let’s Ignite.
- Bank’s Loan – It is the most favored place among the businessman and entrepreneur to go for funding their businesses. The bank normally funds the business in two ways. The first is the term loan which is given for acquiring fixed one time requirements like land, building end machinery or other fixed assets. This loan is repayable in installments for a longer period of time ranging from 5 years to 12 years or more. The other type of funding is working capital finance. This loan is given to meet the financial requirement to run one complete cycle of revenue-generating operation. This type of loan is given an ongoing limit basis where the borrower is required to pay interest on a monthly basis.
All loans of the banks are sanctioned and are given against securities like a mortgage of land and building and hypothetical of machinery, stocks and book debts and other receivables. Funding of Bank loan would involve processes like an evaluation of business plans, valuation of assets, appraisal of project report and verification of other details submitted by the businessman Almost every bank in India offer SME loans which are meant for small & medium enterprises with various options for collateral-free business loans. One can check out with the respective bank for more detail.
- Micro Finance and NBFC – You can approach these two agencies, in case you do not fulfill the requirements of the bank. Microfinance facilities are meant for those who do not have access to conventional banking services. It suits those whose requirement is small and credit rating does not fall within the bank’s norms. Similarly non-banking financial corp. are agencies that provide assistance without the complicated legal process of bank’s loan.
- State programs for startup Capital – The Govt. of India has set up a corpus of Rs 10000 cores in the annual budget in order to boost the innovative business ideas and to convert them into revenue generating units. This corpus was further extended to Rs. 20000/-crores under the Govt. Supported “Pradhan Mantri Micro limit development and refinancing agency” (MUDRA) scheme to benefit 10 lacs SME’s.
The different states across India have also their own schemes for financial assistance to entrepreneur under their separate schemes with the coordination and fund sharing with central Govt. The Govt. Funding is the best option in case you fulfill the eligibility criteria.
Some other quick ways
There are some other ways also to raise funds as mentioned below, However, they may not be suitable to everyone.
a) Product Presale
This means selling your product before they are launched companies like Apple & Samsung raise money through this method. You can use this method if you enjoy very high brand value among prospective consumers and the market.
b) Selling assets
Though it may look like a tough option, it can help you to meet your short term fund needs. You can buy back the assets, once you overcome the crises.
c) Credit Cards
Business credit cards are the most readily available means to finance a startup. You can use the credit end and keep paying the minimum payment. However, in this type of funding interest rate and the cost builds up very quickly. The pending liability of credit cards can be very dangerous to your credit in the market.