Developing a start-up into a self-sustaining and profitable venture requires sufficient funding and efficient financial management. Scoping out the most feasible sources of funding options for small businesses is a crucial practice for all entrepreneurs and must be carried out tactfully & strategically.
Fortunately, numerous prominent financing options are available for up-and-coming businesses in India. Each of them functions as an apt funding source for specific stages of a start-up’s development, and this article from Yubi focuses on every one of them.
Let’s begin by learning how to raise money for a business without a loan.
1. Business Bootstrapping
Bootstrapping involves running your business using its earnings. If you do not have much capital and are just starting, bootstrapping is the most viable way to keep things running. Funding your business using your own money and the business’s revenue can take time and effort. It’s best to keep profits at a minimum until the venture starts generating enough.
Bootstrapping allows you to control your business’s finances completely, without worrying about bank loan repayment or investors’ concerns. You remain the sole owner and get to steer your business the way you feel best.
2. Equity Financing
Promising start-ups can raise capital by selling company stocks to angel investors and venture capitalists. Disruptive and innovative business ideas are more likely to secure equity financing from VC firms and incubators.
Raising funds for your business through equity financing will require entrepreneurs to determine an approximate valuation of their business and propose a specific funding amount. Then, based on these factors, investors and venture capitalists will buy company shares, providing necessary funds to the industry while gaining equity or partial ownership.
The value, credibility, and potential contribution of your investors, how well you can collaborate with them and how much good returns your business can deliver to them are three key factors to keep in mind. Equity financiers expect high returns since they are investing at high risk, so the bigger the funding, the more should be the return.
3. Crowdfunding Platforms
Crowdfunding has now become a popular way of obtaining funds for start-ups. A successful crowdsourcing campaign on a well-known crowdfunding platform such as ImpactGuru, Ketto, Indiegogo, etc., can rake in the big bucks. If the business ideas and model catch the crowd’s attention, funds will trickle in and, eventually, flow in large amounts.
Crowdfunding is competitive, as many other business owners are vying for attention and funds. Therefore, your business idea must be thought-provoking, and your models & strategies must be precise & well-construed.
4. Angel Investors For Startups
An angel investor is generally a high net-worth individual with a sizeable disposable capital for investing in early-stage businesses. Successful business professionals, company executives, erstwhile entrepreneurs who have tasted success in their domains, and dedicated investment firms– anybody with substantial capital and appetite for risk can be the angel investor of a small business venture.
Whether investing individually or collectively, angel investors take risks by investing in innovative start-ups and, thus, expect significant returns. They provide crucial seed funds for your business during a critical stage of business growth when pre-seed funding from family and friends dries up & before venture capital funding rolls in. Investors will agree to a payout based on an equity percentage based on their portion of the investment.
Angel investment is a type of equity financing, and investors are generally in for the long haul. Finding the right angel investors is thus akin to finding the right business partner for your start-up.
5. Peer 2 Peer (P2P) Lending
Peer-to-peer lending is another popular way for a new business to raise funds. The process has aspiring companies needing money connecting directly with lenders willing to offer loans at high risk. Internet-based platforms often act as mediators during peer-to-peer lending between businesses and borrowers.
Peer-to-peer lending is gaining traction as a popular alternative financing source for start-ups. Investors with high-risk tolerance lend money at high return rates to help new businesses meet their working capital and other financial needs.
6. Venture Capital Firms
Venture capitalists are the major players in the business funding domain. Venture capital firms are registered firms where established business minds, executives from an existing business, and high-net-worth individuals pool together money (generally in investment funds) and offer dedicated financial support to a business. Venture capital firms do not just seek equity in a promising start-up for good returns. Still, they are in for the long run, providing funds, offering mentorship programmes, and even helping improve the central business idea.
VC firms are ideal for businesses that have gone beyond the seeding stage and are generating revenues consistently. These firms offer their expertise and work closely with the start-up, acting as strategic partners to help the business tackle challenges and attain new milestones. Firms providing venture capital to start-ups can be government schemes such as the Seed Enterprise Investment Scheme of the UK, the Indian Government’s Venture Capital Assistance Scheme, etc. or an entirely private concern.
While venture capitalists can help boost the growth and sustainability of a start-up, the downside is that they tend to exert a substantial amount of control and may lose interest if a start-up loses stability.
7. Business Incubators & Accelerators
Start-up incubators and accelerators are specialised programs that help early-stage businesses easily raise funds. Incubators and accelerators are generally government-backed or run by major corporations and established businesses.
There are specific differences between incubators and accelerators. Start-up incubators offer strategic support, office space, training & mentorship and help businesses expand their networks. Many incubators prepare a start-up for accelerator programs and even meet significant venture capitalists. However, they only generally seek equity if they provide some funding to the business.
Accelerators offer a second seed funding stage and are unnecessary if a business generates consistent revenues. Instead, they require a Minimum Viable Product in the market and provide quick funds to accelerate cash flow and operations.
8. Raise Funds By Winning Contests
This may seem like an offbeat avenue for raising capital, but many business owners have transformed their fates by winning entrepreneurship contests. Innovative business ideas, stand-out projects, and impressive sales pitches can help owners win over investors funding these competitions. In addition, well-publicised contests can help businesses gain a large amount of money and widespread recognition.
And those were some of the main ways to raise funds for your new venture without borrowing money. However, the above avenues require start-ups to possess an effective business plan, long-term strategies, a clear vision, and, in most cases, an MVP to attract investors.
Next, we look at some prominent debt financing options for Indian start-ups.
Raising Money Through Bank Loans
All major private and public banks in India offer business loans. It may be easier for start-ups with an extensive credit history to avail of bank loans. However, many banks provide secured business loans wherein small businesses pledge certain collateral security.
To avail of typical bank loans, a start-up must be able to provide a comprehensive & well-construed business plan, approximate business valuation, and near-accurate profit forecasts. Two significant types of bank loans for start-ups are:
1. Working Capital Loans
A working capital loan is a short-term debt financing avenue for businesses to meet their working capital needs and maintain healthy liquidity.
2. Term Loans
Term loans can also be ideal debt funding options for a new business venture looking to expand and raise capital. These business loans generally come with long, flexible repayment tenures and fixed or floating interest rates.
Business Loans from Micro-finance Providers & NBFCs
Qualifying for a business loan may be tricky for start-ups or small businesses due to a lack of sufficient credit history and unfavourable credit ratings. In such cases, business loans from NBFCs and MFIs can help. In addition, Micro-financing and non-banking financiers offer bank loans to SMEs and start-ups at convenient interest rates and payment terms.
Startup Funding Schemes by the Indian Government
The Government of India has introduced numerous schemes for budding entrepreneurs. The Startup India Scheme, Stand-Up India Scheme, the PMMY MUDRA scheme, Credit Guarantee Fund Trust for Small and Medium Enterprises schemes, and offerings by the Small Industries Development Bank of India are a host of government-backed systems to fund start-ups.
Low-interest rates, flexible payment terms, refinancing options, lack of the need for any collateral security, and partial credit coverage are some significant benefits of availing of government funding programs. Two essential requisites to avail of government schemes include clear & defined business plans and flawless credit histories, especially of the business owner.
Invoice factoring is a type of invoice finance where a business sells its outstanding invoices to a factoring company. The invoice factoring company offers a certain percentage of the total outstanding amount up front to the business. The factoring firm then collects the payments on those unpaid invoices per standard payment terms. Once all payments have been cleared, the factoring company release the rest of the invoice amount minus a factoring fee.
As may be evident, invoice finance helps businesses release the money stuck in the supply chain and is especially beneficial for start-ups struggling to maintain adequate working capital.
Quick ways to Raise Money for your Business
Here are some other quick ways for a start-up to raise capital.
1. Product Pre-sale
Pre-selling is a risk-mitigation as well as a great way of raising capital. Businesses can gauge public perception about a product early on and get quick cash from pre-orders.
2. Selling Assets
If a business is going through a crisis, selling current assets may be the way to respite. The sale of high-valued non-essential assets is the right choice under these circumstances.
3. Credit Cards
A business credit card can be a reliable and secure source of start-up funding. This is because one can take out frequent credits of any amount up to the permitted credit limit. However, credit cards are debt financing, and businesses must consider the associated interest rates & be ready to manage the credit burden accrued over repeated usage.
The Bottom Line
Reliable and consistent funding sources are vital to any new business’s survival. If you want your business to grow, prosper, and reach the heights envisioned, you must execute acute financing tactics and scope out viable funding sources to keep things running and profitable.
Employ agile, scalable, and comprehensive financial governance & choose from among the funding strategies mentioned above to help your business rise above the rest!