8 Sources of Start-up Financing for your Business
Explore 8 essential sources of start-up financing to fund your business growth. Discover various financing options to kickstart your business today!
Starting a business may appear enthralling but running it may not be that easy, especially for startups with inadequate funds. Money is bound to be an issue in a business sooner or later.
At the same time, utilizing personal assets to fund business needs may not be very wise. So, while considering funds from external sources, it is important to pick carefully the ideal funding option depending on the need.
Here are some of the popular sources of funding for start-up businesses:
• Angel Investors:
Angel investors support startups in their initial phase of growth and expansion. They are private investors or a network of wealthy individuals sometimes with family connections. They provide financial backing to small startups and entrepreneurs in exchange for ownership equity in the company.
Angel investors typically use their own money, unlike venture capitalists who use an investment fund. Getting funds from angel investors means the company does not have to return the funds. This paradoxically happens to be the biggest disadvantage to entrepreneurs as angel investors typically want 10% to 50% of the company’s equity in exchange for funding.
• Venture Capital Firms:
Like angel investors, venture capital firms help young companies that have the potential of providing high returns. Venture capitalists are private investors who provide financial support to new companies in exchange for an equity or equity-linked instrument.
Unlike angel investors who operate independently, venture capitalists work for private investment companies who invest other people’s money. Contrary to the popular belief, most venture capital firms usually do not fund startups right at their beginning phase. Rather, they fund firms that are ready to monetize their idea. However, there are some early-stage venture capital firms that invest in such ventures.
• Government Grants:
Grants are financial awards given by an entity to a company to aid its performance. Usually, grants are distributed in a few stages depending on the fulfilment of certain milestones. So, if a startup fails to meet a goal at a particular point, it may not receive the grant due in its successive stages.
Government funding is provided by both the central government and the respective state governments. Here a special mention must be made about the ‘Startup India’ program, which was introduced by the government of India to support the startup ingenuity of several young business enthusiasts across the country.
• Bank Loans:
Business loans can be availed by entrepreneurs from a bank in order to raise funds. Banks offer different types of business loans depending on the business needs. They charge an interest which is typically a certain percentage of the total loan amount.
To give impetus to the Micro, Small, and Medium Enterprises (MSME) sector and startups in India, the government has now started special business loan schemes that can be availed through many public and private banks.
Though bank loans are one of the most preferred and conventional funding options, many startups face challenges especially because of the strict eligibility criteria of the banks. The biggest advantage of bank loans is that no equity is surrendered to the lender, helping the startups retain their ownership rights.
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• Microfinance Providers and NBFCs:Applying for a bank loan involves a lot of time and paperwork. In some cases, the borrower may have to pledge some collateral. Hence, a good alternative to bank loans is funds from NBFCs. Non-banking financial companies (NBFC) have flexible loan terms and less stringent eligibility criteria. Hence, they are popular among people with urgent capital requirements or weak credit ratings.
• Crowdfunding:It is a good alternative to raise money essential to kickstart a new business venture. It is the practice of pitching a business idea and raising money by attracting and collecting a small amount from a large number of people. Typically, crowdfunding is done through social media and crowdfunding websites. In most cases there are restrictions as to who can fund a new business and how much they can contribute.
• Business Incubators:
Incubators are specially designed programs that act as catalysts helping startups to develop their businesses. Usually, it includes a wide range of services like providing office space, management training, networking and also, financing.
Mostly, the incubation phase is for four to eight months but in some cases it can go up to two years. To apply for an incubation program, entrepreneurs must submit a detailed business plan.
• Bootstrapping:It may sometimes be difficult to fund business from outside. The last option that remains is to use personal money or gather money from family and friends. But self-funding can only be beneficial if the initial amount needed for the business is small.
A large number of startup ideas get nipped in the bud because of lack of adequate funds. Addressing financial requirements properly in a business can help to deal with hurdles and plan ahead of time. In the present market, there are a variety of startup funding sources available to choose from. Before picking the ideal funding option, startup owners must give a lot of thought based on their needs and repayment viability.
IIFL Finance, one of the leading loan service providers in India, offers financial assistance to fuel the business growth of every entrepreneur. To suit their needs, IIFL Finance offers a wide range of loans at attractive interest rates and affordable repayment terms. The company not only offers higher-value business loans but also provides small-ticket loans without any collateral and minimal paperwork through a quick and hassle-free digital application process.
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