Starting a business at first can be a real challenge for some people. Even after having great ideas, they don’t know the source of finance. That’s why sometimes financing your startup can be a real challenge. As an entrepreneur, opting for a business loan can be a good option, but that too takes time. Yes, we will discuss the loan option too, but we will also discuss the types of funding sources and kinds of financing you need to start a business.
According to a study, over 3/4th of the business started to fail due to proper cash flow. Even after so many avenues to get money, it can be intimidating to know why some businesses fail. It may be a lack of awareness or proper planning for growth. That’s why many founders repeatedly ask how to raise funds for a business startup?
After you have done extensive planning on how to grow your business, funding comes just after that. According to your company or nature of the business, you need an effective way to keep your business finances well organized. We will discuss the comprehensive way of managing your finances, starting with self-financing.
Table of Contents
1. Bootstrapping business:
When a person starts a business, the initial capital is mostly funded by self-financing or friends and relatives. This is called bootstrapping. Though some people prefer to take small business loans, in the long run, when they may take share market, this particular aspect may not be a good sign for the company’s image. Some businesses need money from day one; for them, it may not be a good option. But taking money from your savings or relatives makes you more attached to the business and saves you from impending losses in the future.
2. Angel investors:
Angel investors have excess money with them and are keen to invest in upcoming business startups to help them grow. Many big companies like Google or Yahoo have grown with the help of them. Angel investors are keen on taking more equity, as high as 30% for startup funding. They finance new ventures because of possible high returns in future, sometimes in groups or individually. However, this process has its shortcomings too.
3. Venture capital:
When we discuss different startup financing ideas, venture capitalists become an essential part of it. Venture capitals (VC) are well-managed funds by businessmen who have extensive knowledge of the market and can foresee the possible success of the company with their business acumen. Venture capitalists generally invest when startups are at their initial stage and have plenty of growth opportunities.
Though venture capitalists may be the best option when people ask how to raise funds for a business without a loan, they may not be a good source of cash flow who are not willing to give up control of the business. VCs generally mentor the startups and take a good amount of equity for possible growth in the future. But they are very selective and only invest when they think the business will give good returns. So sometimes, because of this attitude, they become reluctant to finance out of the box ideas.
4. Crowdfunding:
lately, crowdfunding has become a good type of funding for startups. It’s like taking loans from multiple persons at the same time. An entrepreneur will give a free ad on a crowdfunding platform with a detailed description of the nature of the business and possible growth prospects in future.
The person will also appropriately say how much funding he needs. It is an excellent step considering most of the general public is involved in funding it without extensive legal paperwork. The public, if like, will then invest and pre-use the product, which works like a boon for a business because the public inadvertently advertises the product without incurring promotional costs. However, it’s one of the best sources of funding for businesses; the limitations here are the competitive nature of crowdfunding platforms.
5. Business incubators and accelerators :
At an early stage, accessing the business incubators or accelerators can be a great decision. Often these incubators are set in almost all the big cities and nurture new business like a parent to child. Whereas accelerators help to take a giant leap when the business is sufficiently developed. Often, when entrepreneurs ask how to raise funds for business in India, incubators work as a source of finance and mentor them and help make connections with industry professionals.
6. Bank loans :
Normally, when entrepreneur think of starting a new venture, the first known and trusted source of finance that come to their mind is a bank. Generally, any bank, be it the private sector or public sector, gives loans for two purposes: working capital for day-to-day operations and funding. Banks also fund a small business. With the usual process of sharing your business idea and valuation of your business, banks will give a loan in its due process. With the help of different government-backed schemes, banks provide 7-8 schemes of collateral-free loans.
7. Microfinance organizations :
Though there are several forms of financial support to MSME and small lenders, there are many times banks become reluctant to give loans to small businesses. That’s when microfinance institutions and NBFCs help with the daily needs of small business owners. They have their limitations because NBFCs provide loans without much paperwork involved. It also charges more interest.
8. Different government programs:
Government initiates startup funding or gives small business loans with the help of the Micro units development and refinance agency (MUDRA) with initial 20,000 crore capital in hand. SIDBI and National small industries corporation always try to help MSMEs and encourage people to start new ventures. With a dream like the “Make in India” campaign, it successfully placed itself as a willing partner for new business ventures.
Conclusion:
If you want to grow your business in future, bootstrapping or self-financing may not be the best option in the long run, as you will always fail to grab different market opportunities. While there are several kinds of financing available in the market, a self-aware businessman should always choose that source of funding for business that gives liberty of expansion completely without a preconceived notion of success.
Frequently asked questions:
Q: Can you start a business with no money?
Ans: Yes, its possible provided you have good knowledge of marketing has some amount of equipment in home.
Q: How do you build equity in a business ?
Ans: It may seem like a tough job, but in reality, it means strategic planning of all your expenses and making a brand over all time, and reinvesting profit in a business.
Q: What are silent investors?
Ans: Silent investors are those who give money to the business but not involved in daily operations.
