How to raise funds for a start-up business is the most crucial aspect for start-ups. To start a startup is not an easy decision as it requires a lot of courage and commitment on the part of the entrepreneur. To run a startup and take it to the success ladder is not that easy and when it comes to the financing aspect, it becomes more difficult. Fresh entrepreneur’s really don’t know how to raise funds for business? This article aims to “Best possible options to raise funds for startup business”.
According to a recent study on startups, it has been found that more than 90% startup or businesses fail during the initial first year of operation. Although there can be numerous reasons behind this, lack of funding is one of the most common reasons for most.
The journey from idea to product development until the revenue generation needs capital. To arrange working capital for a startup business is not that easy. Entrepreneurs must understand the entire startup funding process, startup funding types and the related details. During the initial stage, it is all more important because this is the time when the startup needs business capital at every point.
Table of Contents
Different ways to raise funds for the startup business
Well, when you would require funding and how much largely depends upon the type and nature of the business. However, once you realized the need for funds, you must analyze the different sources of funds or finance available.
Below is a comprehensive guide that helps you “best possible options to raise funds for start-up business”. Some of these options are for Indian entrepreneurs, but similar alternatives are available in other countries as well.
1. Bootstrapping your startup business
Bootstrap means building a business out of personal income, savings, etc.. In another way it is self-funding. Bootstrapping in business means running a business without any external help or capital. The bootstrapped business fund the development of their startup through internal cash flow and are very careful about their expenses. Bootstrapping works normally in the initial stage of a business. It is probably the most inexpensive way an entrepreneur can explore when raising the capital.
Self- funding is the most economical and easiest way of funding because it requires fewer formalities and compliances. Normally your own savings or help from family and friends constitute the funding amount.
Bootstrapping should be always considered as the first funding option because of its various advantages. When you invest your own money you become more responsible and liable towards your startup. But bootstrapping is suitable normally in the initial requirement of business which is comparatively less. In the case of businesses which needs good money or capital right from day one, bootstrapping could not serve the purpose.
2. Crowdfunding a way to raise capital for a startup
This is a recent way of funding a startup business which is gaining popularity. Small businesses can raise money with crowdfunding in exchange for some rewards, promise of future repayment, or equity in the company. Many established companies and Startups can raise funds online while getting new customers. There are various crowdfunding platforms which offer low fees, a large audience, and allow a variety of campaigns. This is like taking a loan or contribution or funding from more than one person or group of persons at the same time.
Crowdfunding is a very easy way of financing your startup business through the donation of money from the public. This is done with the help of crowdfunding websites
Generally, businesses post their business idea as a campaign onto the website, with a description of their project. If people want to support their campaign, they can donate money to help them achieve their goal.
To encourage people to support any campaign, entrepreneurs can offer incentives and rewards based on the amount they donate. These incentives and rewards can be anything, such as merchandise, acknowledgment, discounts on the future purchase of the product which is being developed, etc.
Advantages of Crowd Funding:
There are many advantages of crowdfunding like in this you already have a customer base that believes in your product. You get the opportunity to interact with your customers who are also your investors. In crowdfunding, you don’t need to share equity with the investors. This requires a lower commitment and risk.
Disadvantages of Crowd Funding:
Crowdfunding has its own set of disadvantages as well. There is no guarantee that you will reach your funding goal in the set time frame. You need to have a good campaign to present your product to people to encourage them to fund it. It requires a lot of time to interact with your backers to update them about the product. You need to provide rewards to your backer to encourage donations. High competition with the other businesses seeking funds for their ideas and products
Crowdfunding is a very competitive place to raise funds. Unless you have an absolutely well planned and unique idea or product which must be able to catch the attention of the consumers or prospective investors your purpose will not be achieved.
3. Funding through Angel investors
Angel investors are generally wealthy individuals with extra cash who wants to invest directly in promising upcoming startups. They are often experienced and leaders in their respective field who not only invest in the business but also contribute their experience be it technical or managerial and contact network as well.
In this way, they act as a mentor or advisor as well for the business. We can say that in exchange for their money which is at risk, they reserve the right to supervise the company’s management policies and practices. This might involves a seat on the board of directors as well. Angel investor may be individual or groups of networks who screen your proposal well before investing.
Angel investors tend to finance the early stages of the startup with investments in the order of $25,000 to $100,000.
So many prominent and successful companies got the funding via angel investors in their early stage.
Angel investors offer mentorship and guidance along with the capital. Also willing to take risks on the idea on the anticipation of a higher return on investment from the startup.
There are many popular Angel Investors in India
4. Venture Capital for your startup business
Venture capital funds (VCF) are the funds from investors against which investors seek private equities in startups, small and mid-sized enterprises having a strong potential for growth. They are big institutions that are dedicated to investing in new startups and are regulated by the guidelines issued by SEBI (Securities & Exchange Board of India). There is a high risk involved in funding new ventures. But the investors agreed to invest because they anticipate high returns on the investments made.
To procure venture capital is not an easy task. You need to present the pitch deck and pass several rounds. Once the investors are confident of the venture success they agree to go ahead with the investment. The venture must have the potential to grow and the capital invested is known as Venture Capital. The venture capital funds are released on the basis of the company’s worth, size and stage of product development.
To beg the venture funds is quite difficult for the startups which have not yet started generating revenue. Also in the case, if you have a product that is taking a long time of more than 3-5 years to generate the revenue and capture the market. Venture capitalists are interested more for big opportunities. In the ventures that are more stable with having a strong team of people and very good market traction. In this, you must be ready to share the control of the business in the form of equity in order to get capital.
5. Funding From Business Incubators & Accelerators
Startup accelerators and incubators are organizations that help startups to attain success. They are are organizations which tend to focus on providing startups with mentorship, guidance, advice and necessary resources to help the startups succeed.
Startups which are on very early stage can consider Incubator and Accelerator programs as a funding option. These programs assist the number of startups and found in every major city.
Usually used interchangeably, there are some fundamental differences between the two terms. Incubators are like a parent to a child, who cultivate the startup providing shelter tools, training, and network to a business. Accelerators also do a similar thing, but as an incubator helps, assists, cultivate a business to move, while accelerator helps to run and take a giant move.
These programs usually run for 48 months and require a time commitment from the entrepreneurs. During the program, you will be able to make good connections with mentors, investors and other fellow startups using this platform.
6. Raise Funds By Winning Contests
In the fast few years, the focus on startups has been tremendously increased. A large number of contests are going on to encourage startups. These contests have helped to maximize the opportunities for fundraising. In such competitions, the owners either have to build a product or prepare a good business plan.
Winning these competitions can also get you good media coverage. You must be able to stand out your idea or plan in order to improve your success in these contests. It must be able to convince investors that your idea is worth investing. This can be either done by presenting your idea or product in person or by preparing a business plan or pitch deck.
Some of the popular startups’ contests in India are Microsoft Startups, Conquest, NextBigIdea Contest, NASSCOM’s 10000 startups, and Lets Ignite. You can check out the latest startup programs & contests in your area.
7. Raising loans from Banks
When an entrepreneur looking for funds for their startups the first thing comes to mind is the bank. The bank provides two types of loans. First is working capital loan, and other is funding. The working capital loan is given by a bank to run one complete cycle of revenue-generating operations, and the limit is usually decided by estimating stocks and debtors. Second option i.e funding from bank would involve the process of submitting business/project plan, the valuation details, etc. The loan is sanctioned based on the scrutiny and other formalities.
Normally every bank in India offers SME loans/ finance through various schemes and programs. For example, leading Indian banks are State Bank of India , HDFC, ICICI, and Punjab National Banks banks have more than 7-8 different options to offer collateral-free business loans. You can check the respective bank sites for more details.
8. Business Loans from NBFCs or Microfinance Providers
Generally, banks have very strict guidelines and scrutiny process to sanction loans which most of the startups don’t qualify. In case of loan refusal from the bank, there is still an option which is business loans from NBFC’s. Loans from NBFC or Microfinance institutions usually can be sanctioned to those who would not have access to nationalized or private banks or have been rejected from them. It is gaining popularity for the startups who have limited requirements and credit scores are not acceptable by banks.
9. Startup Capital through Government Schemes and Programs
The government of India has introduced over 50+ startup schemes in the last few years. Each and every startup scheme is missioned towards boosting the Indian startup ecosystem. There are almost 4400 technology startups that exist in India and the number is expected to touch over 12000 by the year 2020. India is in the third position in terms of a number of startups after US and Britain.
In the past few months, the Indian Government has come up with a wide range of startup schemes and startup funds to encourage the launch and growth of startups in the country.
These Government schemes for startups have been introduced over a period of time. And many of there were already there before the launch of the Startup India plan. But most of the startups are not aware of the schemes and don’t have a guideline on how to procure them.
There are more than 50 plus startup schemes and programs introduced by the Indian Government to support the Indian startups, SMEs, MSMEs, small scale industries, etc.
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.The loan is sanctioned once you get the approval on the submission of your business plan. You get a MUDRA Card, which is like a credit card, which you can use to purchase raw materials, other expenses, etc. are There are three categories of loans available under the promising scheme as Shishu, Kishor, and Tarun. Learn more about MUDRA.
Also, different states have different programs and policies to promote and encourage startups in their respective states.
SIDBI – Small Industries Development Bank Of India also offers business loans to the MSME sector.
There are many options through Government funding for startups in India. Go through the Startup India and know more about the initiatives for startup funding and encouragement.
10. Other quick ways to raise funds for startups
Although there are many sources available to raise capital for startups. But sometimes the process and formalities take too long to get the funding for a startup business. Also, it is not sure if the startup will be able to raise the funds or not. There are a few more ways to raise funds. However, these might not work to everyone. You can try if any option might work for you in case of quick funds.
- Credit Cards: One of the most common ways to immediate funds are business credit cards. It is a quick way to get instant money. For a new startup whose expenses are less, can use this and keep paying the minimum amount. But always keep in mind that there is a very high-interest rate. This will cost very heavily and carrying that debt can be very harmful to a business owner’s credit score.
- Selling Assets: Although I will not advise this method unless it is very urgent. This may meet your short term fund requirements. You can buy back the assets once you are in good condition.
- Product Pre-sale: This option works with few products and a company with a brand name. In this owners can raise funds by selling your products before they are actually launched in the market. You can take the e.g how Apple, Samsung, MI start pre-orders of their products well ahead of the official launch.
Every startup wants to grow fast, and for that outside funding is very much needed. If you are bootstrapped and remain without external funding for a long time, you may be unable to take your business to the next level and take advantage of market opportunities.
Well, I hope by the time you must be aware of the various lending options available in the market. But the wise business owner must understand the need, procurement, and utilization of the funds raised. “Best possible options to raise funds for start-up business” and take your business to the success ladder.
If you like to share your comment on this please feel free to post in the comment section below.