.7 min read

All new businesses start with high confidence, trust, and hopes. But cash flow is the lifeblood for anysmall business, and most fail because they run out of capital. That is why the question on most entrepreneur’s minds is how do I finance mystartup?

Indian start-ups receivedseed fundingto the tune of $ 4.6 billion in April 2021, a nearly 3 times increase from $ 1.6 billion raised in March. The number of deals was 111, and eight companies entered the hallowed unicorn club, including social commerce firm Meesho, an e-pharmacy start up PharmaEasy. E-commerce startups are thriving during the pandemic because a large number of people are utilising their products or services.

Lean Startup

Lean Startupis a methodology that favours experimentation over elaborate planning and can make the process of starting a company less risky. This method is used to found a new company or introduce a new product on behalf of an existing company. Lean start-ups continually gather customer feedback and use it to reengineer and further improve their products.

Since lean start-up companies spend a lot of time and resources in iteratively building products or services for new customers, they do away with expensive product launches. So, their funding requirements are smaller.

According to a 2021 Guidant Financial Report, the number one method that entrepreneurs fund their business is personal cash (39%), followed by tax-free retirement savings (20%), and family and friends (10%). In this article, we will guide you on how to raise capital for your dream start-up, and the pros and cons of different ways of doing it.

Nuances of raising money

For a start-up business, cash is the most important thing to raise and sustain. When you will need money for your business is largely determined by the course of your business, and its operations. Once you have decided to raise funds, the following financing options are available to you:

two businessman shaking hands after getting the loan approved by bank

1. Banks

Previously banks were the only choice to raise money for businesses. But, they were not very supportive of small businesses or entrepreneurs while giving loans. One of the requirements that banks look for while reviewing a loan application, is good credit history.

Try to maintain a good long-standing relationship with your local bank. There is an equipment financing loan for business owners who require money to buy equipment or new machines, furniture for the office, etc.

2. Self-Funding or Boot Strapping

Bootstrapping means starting your business from ground zero with self-funding. It is the best option to start a business where you use your personal savings or resources. However, you should consider it only if the initial requirement is small, and you have sufficient savings.

如果情况许可,从famil筹集资金y and friends can be the lifeline for many small businessmen. They are the ones who know you better than anybody and will believe in you. Unlike other lenders, they will not put pressure on you to return the money. Try to plough back the revenue from the first few months of sale, back into the business.

3. Crowdfunding

It is one of the new funding options where one can share his business idea or model that has the growth potential. In this, the entrepreneur gives details of his business at crowd-funding platforms, e.g. goals of his business, plans for making a profit, etc. The most popular platform for sharing these ideas is social media.

The early stages of crowdfunding were product-based, and you had to show people your product prototype. You had to appeal to investors to invest in your business so that you could develop it further, produce it, and ship it to people. It is similar to taking up a loan, in terms of contribution and investment from interested people.

4. Get Angel Investment

Angel investors are high net-worth individuals or a group of individuals who have surplus cash and want to park that cash by investing in promising companies. They are also known as private investors or seed investors. They are the first external funding source for start-ups. But note that they will carefully scrutinise your business before investing, and can buy in equity.

Angel investors have helped in the formation and growth of many well-known companies like Alibaba, Google, and Yahoo. They help the company to grow rather than focus on profits.

5. Venture Capital

Venture Capital funds are those funds that invest in businesses that have high growth potential. In lieu of their funds, they receive shares, which they can sell off at the time of the I.P.O. As a first-time entrepreneur you must prepare a business plan and present it before the Venture Capitalists (VC)s.

V.Cs often bring their expertise and guide start-ups in the nascent phase. Often, they stay invested for a long time, and pull back their funds in 4 to 8-year cycles. One thing to note is that these V.C. funds are often under a lot of pressure to perform, and they in turn put pressure on the founders of the start-ups to perform.

6. Line of credit

One method that you can use to raise money is to apply for a business line of credit. Before applying, you have to do your paperwork, like preparing a business plan and concept, registering your business, and so on. A business line of credit is a revolving line of credit that lets you borrow a certain amount of money.

7. Sell your services ahead of time

You can get your clients to pay in advance or give a deposit for your services. It all depends on your relationship with them. You can also look at ways that they can become part of your growth strategy.

让我们假设你自己的广告公司,do branding work for a reputed car company. As the business grows, you are working on new markets in different cities. At this stage, you can ask the car company to give you funds for expansion. Some of it can be in lieu of invoices raised. It will be a win-win situation for both.

8. Equity

Equity financing takes place when an investor gives you funds but does not take a share of the profits in return. Instead, he takes a chunk of shares, which is called equity. If you can offer the equity of your company on a platform, then a lot of people can then join and invest. Though there is less pressure on the start-ups for repaying at an agreed date, the investors do insist on growth targets.

business man calculating amount on calculator on table

9. Partner Financing

If a company or an individual takes interest in a start-up’s product or services, and decides to fund it, it is known as Partner Financing. Sometimes it is better to get into a partnership/licensing with a bigger company than struggling on your own. Suppose, you invent a battery for an inverter that lasts twice as long as conventional batteries. You have two options-a.) Go through the lengthy and costly process of developing or marketing your product. Or, b.) Get into a licensing deal or joint venture with a bigger manufacturer who will be happy to promote your product. Which one will you prefer?

10. Business Accelerators and Incubators

Business accelerator and incubator programs are found in almost every city. They provide funds to hundreds ofstart-upbusinesses that are just starting out. There is a slight difference between them-while accelerators fast-track businesses, incubators nurture them.

As asmall businessowner, you would need to cash to fund inventory, hire labor, and advertising. We hope that after reading this article you will figure out what is the best way forward to make your business work. If you know anybody out there who is trying to raisestart-up fundingand doesn’t know how maybe you can share this article with him!

Also Read:

1)Here’s How to Start Best Waste Management Business
2)How Covid-19 Lockdown has Impacted the Garment Industry?
3)How to Make Your Presence Felt on eCommerce Platforms?
4)Stakeholder and their Impact on the Success of a Small Business

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Q. What is the biggest disadvantage of bootstrapping?

Ans. Bootstrapping is not suitable for large enterprises, but is only useful for small businesses.

Q. If your funding requirement is more, to whom will you go first - an angel investor or a venture capitalist?

Ans. Angel investors typically invest less than VC Funds, since the latter are more organised.

问:为什么do many start-ups opt for venture capitalists, even though VCs take a part of ownership?

Ans. Sometimes, they are the only option for entrepreneurs who do not have any physical collateral.

Q. Do equity investors have any say in the affairs of a start-up?

Ans. Private equity investors are often involved in the decision-making process.