2 Mar 2020, 10:00 — 7 min read
Background: Choosing the ideal source for financing your business is a vital decision for a startup. In her previous article Shruti Aggarwal shared 6 tips to grow your startup faster. Here she explain the different types of funding options available for startups.
Lack of funds is one of the main reasons why startups fail in their early years of operations. Finances are the lifeline of any business. There are various funding options available to startups than were not available in the past. So, if you are having a problem getting funded, don’t worry. Here is a detailed guide of the top 9 funding options that will help you raise capital for your business.
Bootstrapping means utilising your money to get the business started. This is by far the oldest and most preferred form of financing a startup, as it results in no equity dilution.
Herein, money is less difficult to raise due to fewer formalities/compliances, plus fewer costs of raising. In most situations, family and friends are flexible with the interest rate.
Also read: Save wickets: Bootstrap your business
Crowdfunding is one of the newer ways of funding a startup that has been gaining a lot of popularity recently. If you are looking to raise relatively small amounts, then crowdfunding could be the right option for you. You just have to make sure that the platform you have chosen is right.
Crowdfunding is like taking a loan, pre-order, contribution or investments from more than one person at the same time. The best thing about crowdfunding is that it generates interest and helps in marketing the product alongside financing.
Angel investors are wealthy individuals who will provide you funding in exchange for a share of equity in the business. Some angel investors work in groups and screen deals together before providing funds, while most work on their own. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.
Venture capitals are professionally managed funds who invest in companies that have huge potential. Venture capitalists are investors who put in a significant amount of money in exchange for equity in the business. They get returns when the business goes public or is acquired by another company. Venture capitalists not only provide funding but can offer expertise and mentorship to help develop the business.
Incubator and accelerator are programme facilities that assist hundreds of startups every year. Early stage businesses consider incubator and accelerator programmes as a funding option. These programmes run for 4-8 months.
Incubators and accelerators provide every help that a startup needs, like funding, marketing, mentorship, etc. The only requirement is time commitment from the business owners. You will also be able to make genuine connections with mentors, investors and will learn a lot from other fellow startups using this platform.
With the development of the startup ecosystem in India, the number of events related to startups and startup ideas has also increased. These contests accept applications from entities with diverse backgrounds. If you just have an idea or a newly started company, these competitions will help you grow.
The upside of participating in such competitions is visibility in media and the opportunity to network with investors and of course some money also.
Bank loans are a popular source of funding for many startups. Before applying for a bank loan, it’s important to know the detail of each available option and the interest rates that come with each option. These collateral-free loans may range from INR 5 – 20 lakhs and typically carry an interest rate of 17.0% to 20.0%. Secured loans and priority sector loans are significantly cheaper for obvious reasons.
And also, you don’t have to give up control of your business through this mode.
These are individuals with wealth and existing businesses. They look for investment opportunities in upcoming ventures. They typically invest for 1-3 years and expect their investment to double or triple. This type of funding is suitable for ventures which have a low development period and can start generating positive cash flows within less time.
Government institutions such as SIDBI, NABARD, and NSIC are supporting MSMEs by offering loans at lower than market interest rates.
The lending done by these institutes is governed by regulatory requirements. Government-backed ‘Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA)‘ starts with an initial corpus of INR 20,000 crore to extend benefits to around 10 lakhs SMEs.
Also, different states have come up with different startup development programmes like Kerala State Self Entrepreneur Development Mission (KSSEDM) to encourage small businesses.
Also read: Need a loan? Government schemes for MSMEs in India
Image source: shutterstock.com
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By Varun Bhagat