You have a great business idea. Now, you want to start executing it. The first hurdle that you're likely to come across is – lack of funding. Capital is the bloodline of any successful startup venture. This is why we find entrepreneurs across industries asking the question, "How do I find the capital for my startup business?"
Here, in this guide, let’s explore the different ways and means how startups can get their venture off the ground.
The first step for startup funding is to tap into your personal resources. However, before you opt for this option, you need to ensure that you are not stretching your personal finances to the breaking point. Make sure to analyse the quantum of requirement, the ability to fund it from your savings, before issuing a self-cheque.
The biggest advantage of bootstrapping is that it doesn't require any documentation, and you can get started with your business quickly. It's ideal for tiny startups that do not require extensive capital.
While bootstrapping frees you from the commitment of answering to your investors, there are several factors to consider before you opt for it. Make sure to consult with your immediate family, as your finances can impact them as well – especially your spouse and children.
If you can pull out enough funds from your savings without impacting the rest of your finances, you can go ahead with this step. Else, you need to look for other funding options, as it doesn't make sense to put your family's dreams on hold.
2.Reach out to Friends and Family
Your family and friends are a safety net for you. They are likely to trust in your capabilities and are empathetic towards your dreams. Reach out to your extended family, close friends, and acquaintances to see if they are willing to loan you with capital to start your business. Make sure to explain your venture and your passion for them. Communication is vital here.
You can easily avail of a low-interest loan or even interest-free loans from your friends and family. Just like bootstrapping, this funding method is devoid of documentation and other legal hurdles.
However, you run the risk of losing your friendship and relationship, if the venture doesn’t turn out as expected.
3.Startup/Business Loans from Banks
For years, this was the most preferred option for business funding. Banks are considered a safe and secure way to obtain funds for startups.
With the banking sector introducing several innovative loans to support small businesses and startups, this remains as one of the popular choices for securing funds. Banks have the potential to offer swift, economical funding solutions.
Furthermore, banks offer multiple lending options for startup owners like small term business loans, working capital loans, infrastructure loans, overdrafts, etc.
The downside of this funding choice is that banks have a conservative outlook. They have strict lending eligibility criteria, and you need to prove your repayment capabilities before you are approved for a loan. Banks analyse the credentials of the entrepreneur before sanctioning the loan.
Additionally, you have to prove the viability of your project to get approval for the loan. This includes submitting a detailed business plan, which outlines market opportunities, short and long-term profits expected, etc.
4.Loans from NBFCs (Non-Banking Financial Institutions)
Just like banks, NBFCs are another popular choice for startup loans.
Relaxed eligibility requirements when compared to banks. Faster processing times, simpler documentation are other benefits of applying for startup loans at NBFCs.
The interest rates offered by NBFCs is a bit higher than loans availed from banks. This can prove to be costly for startups, especially when they are cash strapped during the initial stages.
5.Loans from Micro Financiers
They are similar to NBFCs and offer microcredit to startups, micro, small and medium businesses.
The interest rates of loans from micro financiers are not as steep as that of NBFCs.
The quantum of finance available is small. If you're a small startup, looking for modest funds, then micro-financing companies are an ideal choice.
6.Credit Card Loans
Business founders can avail short-term loans on their credit cards to meet their funding requirements.
Easy to avail and access to quick funding.
However, this option is not recommended as the interest rates charged by credit card loans are quite steep.
Incubators are not strictly means of funding. Instead, they provide expert guidance for startups, especially during the initial stages. They offer all the support and handholding for startups during the neonatal stages of growth.
From helping startups find the required office space to assisting them with legal documentation, incubators offer multi-dimensional support for businesses. You can learn how to avail funding for your startup from the mentors at your incubators. Some mentors even help you connect with potential investors.
There are several incubators all across the country. Leading educational institutions and industries have set up incubators in various domains.
Finding an incubator to take you in their wings may be difficult, primarily if you're located in rural towns and smaller cities.
They are similar to incubators. They offer multi-dimensional support for startups. However, they have more defined program structures and agendas. Generally, accelerators provide short-term support for startups with hands-on guidance from mentors and experts from various domains. During this short-term, entrepreneurs can learn the ins-and-outs of the business.
Another significant difference is that unlike incubators that do not offer to fund directly, accelerators provide seed funds for startups.
When you are accepted by an accelerator, you are assured of seed funding as well as other extensive support and guidance to set up your venture.
The selection process to qualify for an accelerator’s funding is extremely tough. Additionally, most accelerators are short-term programs ranging from three to six months. So, if you’re looking for extended support, then this isn’t the right choice.
These are high-net-worth individuals who invest in businesses in exchange for shares.
You will need to present a detailed business plan to attract the attention of these investors. The target investors include elite businessmen, affluent clientele who are looking to put their idle money to work. Since these individuals are well-to-do, they are ready to offer interest-free funding, provided your business idea appeals to them.
Gaining access to private high-net-worth investors is difficult unless you are acquainted with them.
This is the most preferred way to raise funding for startups in this social era. Entrepreneurs and startup owners use various crowdfunding platforms to pitch their ideas to the general public. Interested individuals can then invest in your startup.
Some of the popular crowdfunding platforms are:
Easier to raise a large amount of funding as a large number of people pitch in. Unlike traditional sources of financing, there are no eligibility requirements or need for a business plan. All you need to do is get people interested in your ideas/products to raise the required funding.
The one drawback is that you don’t have any sort of rapport with prospective investors.
The Indian government has introduced several innovative schemes to fund entrepreneurs and to pave the way for the growth of startups. Make in India, Digital India, Upskill India are some of the popular programs.
Once you meet the eligibility requirements, you can quickly avail of the required funding to set up your venture.
The conditions for eligibility are strict, and you have to clear all the required terms and conditions before you can qualify.
Angel investors are high-net-worth individuals or groups of investors who invest in startups in exchange for equity ownership in the business. Angel investors are highly aware of emerging markets and trends and well-versed with technology. This helps them invest in startups that have the potential to strike big in the coming years.
Some popular Angel investing firms in India include:
Indian Angel Network, etc.
With several angel investment firms in operation, finding the right one for your startup is quite easy. All you have to do is pitch your product/service/business idea to them. If they are interested, you can negotiate the investment terms and conditions of the partnership. Generally, Angel investors ask for 10 to 50% of the total equity of the business, depending on the quantum of investment.
Startup founders have to give complete control over their business when they use Angel investors to fund their business. However, this is quite a justifiable trade-off for the funds received.
Venture capitals have emerged as the go-to source of funding for all startups. VCs are cash-heavy and have tons of experience and expertise working with startups across all domains. Additionally, they have numerous subject matter experts offering VCs guidance on selecting startups.
Unlike Angel investors, VCs offer guidelines for the growth of the startup as well as the required funding.
Just like with Angel investors, startups have to pitch their ideas to get approved by venture capital firms. Once approved, they are assured of the required funding, as well as additional support and guidance.
Generally, VC funding is available for startups that are in the growth phase and not for startups that are just getting started.
14.IPO (Initial Public Offer)
It's generally considered as the last recourse for startups to raise funds. There are plenty of steps to be followed before a startup can offer shares to the public. The process is elaborate, and there are several legal formalities to be followed.
IPO works well for startups that have an impressive track record and are known for generating profits.
The process is lengthy and complicated and requires the help of legal experts.
Sometimes, popular companies like Google, Facebook, Microsoft, and even renowned educational institutions like the IITs, IIMs announce competitions for the best startup ideas. The winners are awarded substantial prize money that they can use to fund their venture.
If you have a unique idea that is likely to turn heads, then you can try out your luck by taking part in these competitions.
The drawback of this method is that they are far and few, and there is no guarantee that you will avail of funding.
Choose the Right Source of Funding and Kick-start your Startup Venture
Not all of these funding options are available or ideal for all startups. Note that the right way of funding has a long-lasting impact on your startup. So, make sure to analyse the pros and cons of each method, the availability before making the final decision.