Startup is a buzz word these days that has gained popularity in most of the countries but raising funds for start-up for any entrepreneur is like a herculean task. The necessity for a viable source of capital doesn’t end with the start-up cost alone, but you also need finances to meet day to day expenses of the company, as to take your startup to the next level. You will need to create a blueprint or make a business plan so that you can pitch your startup idea to the investors. As before giving you financial support, the investor will look after your motive or objective for starting up a business and also the future valuation of your business. So before asking for the financial support keep the following pointers in mind:
- To prove your credibility use references or networking
- Convince them about returns on their investment by pitch your future business value from the first operational round
- Extend your hand to the investors as if you are looking for advice and not funding as they can guide you better
- Stay in touch and follow-up with your investor to keep a track regarding your start-up finance
Once you have an idea to pitch your business plan to the investors, it is time to see the viable sources of capital to finance your business. Here is a list of the most popular one:
Before, you look out for investors to check out your own personal saving along with your credit card limit to fund your startup. You will be amazed to know that Google founders used credit cards to invest their business idea. Personal investments are considered as a key force for bank approvals. It is not as simple as it looks as the use of credit card can chalk up huge debt which may damage your credit rating or credit score.
Small Business Grants
The Government of India provides grants for start-ups and small businesses. Currently, there are various national programs across India to support start-ups and small businesses such as
- The Start-up Fund
- Bank of Ideas and Innovations
- MUDRA Loans
- SIDBI (Small Industries Development Bank Of India)
- Maharashtra Centre for Entrepreneurship Development
- KSUM (Kerala Start Up Mission)
You will find the perfect source of finance to kick-start your business if you can pass the eligibility criteria for these programs. In addition to this for women and minority-owned businesses, there are other additional grants that the government provides. You can also approach the local Chamber of Commerce.
Love Money/Patient Capital
Do not get baffled with the term patient capital or love money is a capital extended by your friends or family or acquaintances to fund your startup in the initial stages. This is usually an informal way of funding and you do not have to create a business plan or blueprint antecedently. In simple words, you would not be legally bound to pay the debts or dues.
This is the most convenient and popular forms of investment if you can convince the bank to pass the loan applied for in the terms of future returns from the investment. You can also mortgage or hypothecate your personal belonging to approve bank loans so as to invest the same into your startup. The bank gives two types of financing first one are working capital loan and the other one is Longer-term commercial loans.
A long term commercial loan is for startups to kick start their business.
Working capital is a type of fund that a bank provides to carry out the yearly operations of the startup such as employee salary, worker wages etc.
Venture capital is a professionally managed fund that finances a company which has huge potential in terms of sustainability and growth. Venture capitalist guides and provides mentorship to the business and generally exit when there is an Initial Public Offer or an acquisition. A venture capital investment is appropriate for small businesses that are generating revenues and are beyond the phase of startup. However, there are a few drawbacks of venture capitalists they are not loyal and often try to recover their invested money within 3 to 5-year tenure and they often give too much mentorship which may, in turn, hamper the working capacity of the business.
Angel Investors are those individuals that have high net-worth who provide support to venture and startups. These are the people who will patiently listen to your pitch and may collaborate with you without getting into the technicalities of your startup or venture. Angel Investors are appropriate for start-up funding since they do not ask for higher equities from the returns, unlike venture capitalists. But there is a downside of the angel investors that they do not invest huge amount when compared with the venture capitalist.
Incubators and Accelerators:
These days every industry has introduced the concept of business incubators to help your startup in terms of financing and training so as to cover all the initial startup cost. On the contrary, accelerators provide financial support at the time of startup expansion. Just like venture capitalists, Incubators also acts as a mentor-cum-investor for startups to help the startup to know the market growth trend.
Crowd funding is newly emerging concepts that have been gaining popularity in the world of microfinance. It is like an investment that can be raised by you through different people collectively at the same time. You just need to create an elaborative and attractive business plan which can attract the common public and help them to understand the prime objective and benefits, and share them on crowd funding websites & platforms. The advantage of crowd funding is that it not only gather the capital you require for the startup but also aware of the general public about your startup.
The Bottom Line
If you want to grow and expand in the market, you need an external source to finance your startup. If you remain without an outside source of funding for too long and keep bootstrapping you might lose the market opportunities.
Hence, choosing the right source of funding is a crucial part of the business strategy. Therefore, before starting up a new business you need to evaluate what type of business you are starting and what type of funding will it require.
“The information contained herein is not intended to be a source of advice with respect to the material presented, and the information and/or documents contained in this article do not constitute any personal advice.”