How do I finance my startup? Top ways…
Did you know that over 90% of startups fail during their first year of business, and sadly enough lack of fund is one of the prime reasons. Not only that, many business ideas never see daylight due to the fear of running out of cash in the course of it. The biggest support required for a business journey from its “idea” to “revenue generation” is definitely “capital”.
And the biggest worry the startup owners have is – How to fund my business idea? So here we go, top ways to take care of funding for your startups.
To start off with, the requirement of funding depends mainly on the type of business idea, the target audience and the sustainability. However, here’s a list of top 10 funding ideas to raise capital for your startup.
Crowdfunding is a relatively new word in the startup scenario, that’s gaining popularity in recent times. Roughly explained, it’s taking a loan, pre-order, contribution or investments from more than one person at the same time.
In crowdfunding, an entrepreneur puts up a detailed description of his business on a crowdfunding platform, mentioning the goals of his business, plans for making profits, future plans, diversification plans and how much funding is required for all these and with convincing reasons. Consumers read them all, and if they like the idea, they would offer funding. The ones offering money would make online pledges with the promise of pre-buying the product and giving a donation.
The best thing in crowdfunding is that it can also generate interest and hence helps in marketing the idea or the service or the product alongside financing. Also, even if you are not sure of any futuristic demand of your products, it’s profitable and non-risky. Since common people are the ones involved in funding, it cuts out professional investors and brokers.
However, before applying for crowdfunding, be sure of your idea is competitive enough to gain attention of the consumers just through a glance at the description and images. Impress at the first sight, as it’s a competitive world out there.
2. Bootstrapping or self-funding
Most commonly used in India, self-funding is one of the most effective ways to startup your business idea. Before asking for loans, or crowdfunding, one can anytime use one’s savings or family’s contribution. There are less formalities, responsibilities and risks in raising funds.
As a matter of fact, bootstrapping should be considered as your first funding option mainly because of its availability and advantages. When you have your own money, you are tied to business. On 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 the day-1 and for such businesses, bootstrapping may not be a good option.
3. Angel Investment
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 do 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 upto 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.
4. Venture Capitalists
Here comes the one you can bet big on. Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a 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 organisation 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-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 a 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. Business Incubators and Accelerators
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 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.
6. Contests and competitions and events
An increase in the number of contests and events has tremendously helped to maximize the opportunities for fund raising. 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. 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. Bank loans
Bank is the most common place entrepreneurs go to for funding help. The bank provides two kinds of financing for businesses. One is working capital loan, and 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 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, ICICI and Axis banks have more than 7-8 different options to offer collateral free business loans.
8. Micro finance providers or NBFCs
What do you do when you can’t qualify for a bank loan? There is still an option. Micro Finance is basically access of 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 favoured by bank.
Similarly, NBFCs are Non Banking Financial Corporations are corporations that provide Banking services without meeting legal requirement of a bank.
9. Government programs and fundings
The Government of India has launched 10,000 Crore Startup Fund in Union budget 2014-15 to improve startup ecosystem in India. In order to boost innovative product companies, Government has launched ‘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.
Also, different states have come up diVerent programs like Kerala State Self Entrepreneur Development Mission (KSSEDM), Maharashtra Centre for Entrepreneurship Development, Rajasthan Startup Fest, etc to encourage small businesses.
10. Few more fast ways
There are 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 e 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 cash flow and prepare yourself for the 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 a 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.
Conclusion & Next Steps:
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 fund raising? 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 a good accounting software and keep your finances in order.