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  • Writer's pictureScholenberg

Funding Options To Raise Startup Capital

No matter how great your business idea is, one essential element of startup success is your ability to obtain sufficient funding to start and grow the business.

A startup might require funding for one, a few, or all of the following purposes. It is important that you, as an entrepreneur, are clear about why you are raising funds. You should have a detailed financial and business plan before you approach investors.

  1. Prototype creation, product development, website/app development

  2. Team hiring

  3. Legal and consulting services for your startup

  4. Raw materials and equipment

  5. Licenses and certifications

  6. Working capital

  7. Marketing and Sales

  8. Office space and other admin expenses

There are multiple sources of funding available for startups. However, the source of funding should typically match the stage of operations of the startup. Please note that raising funds from external sources is a time-consuming process and can easily take over 6 months to convert.

According to a recent study, over 94% of new businesses fail during the first year of operation. Lack of funding turns to be one of the common reasons. Money is the bloodline of any business. The long painstaking yet exciting journey from the idea to revenue-generating business needs a fuel named capital. That’s why, at almost every stage of the business, entrepreneurs find themselves asking – How do I finance my startup?

Bootstrapping your start-up business:

Self-funding, also known as bootstrapping, is an effective way of startup financing, especially when you are just starting your business. First-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success. You can invest from your own savings or can get your family and friends to contribute. This will be easy to raise due to fewer formalities/compliances, plus fewer costs of raising. In most situations, family and friends are flexible with the interest rate.

It's Advantages

When you have your own money, you are tied to the business. At a later stage, investors consider this as a good point. But this is suitable only if the initial requirement is small. Some businesses need money right from day-1 and for such businesses, bootstrapping may not be a good option.

Crowdfunding as A Funding Option:

Crowdfunding is one of the newer ways of funding a startup that has been gaining a lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time.

This is how crowdfunding works – An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much funding he needs and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.

Why you should consider Crowdfunding as a funding option for your business: The best thing about crowdfunding is that it can also generate interest and hence helps in marketing the product alongside financing. It is also a boon if you do not sue if there will be any demand for the product you are working on. This process can cut out professional investors and brokers by putting funding in the hands of common people. It also might attract venture-capital investment down the line if a company has a particularly successful campaign.

An angel investor (also known as a private investor, seed investor, or angel funder) is a high net worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.

Angel investors have helped to start up many prominent companies, including Google, Yahoo, and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting an up to 30% equity. They prefer to take more risks in investment for higher returns.

Here is what angels particularly care about:

  1. The quality, passion, commitment, and integrity of the founders

  2. The market opportunity being addressed and the potential for the company to become very big.

  3. A clearly thought out a business plan and any early evidence of obtaining traction toward the plan.

  4. Interesting technology or intellectual property.

  5. An appropriate valuation with reasonable terms (angel investors are investing at an early stage when risk is highest, so they typically require lower valuations to compensate)

  6. The viability of raising additional rounds of startup funding if progress is made.

Get Venture Capital For Your Business:

Start-up companies with the potential to grow to need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists.

This is where you make the big bets. Venture capitals are professionally managed funds that invest in companies that have huge potential. They usually invest in business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship, and acts as a litmus test of where the organization is going, evaluating the business from the sustainability and scalability point of view.

A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues. Fast-growth companies like Flipkart, Uber, etc with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network, and grow their company quickly.

However, there are a few downsides to Venture Capitalists as a funding option. VCs have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window. If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.

Get Funding from Business Incubators & Accelerators:

Early-stage businesses can consider Incubator and Accelerator programs as a funding option. Found in almost every major city, these programs assist hundreds of start-up businesses every year.

Though used interchangeably, there are few fundamental differences between the two terms. Incubators are like a parent to a child, who nurture the business providing shelter tools and training and network to a business. Accelerators so more or less the same thing, but an incubator helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap.

Raise Money Through Bank Loans:

Normally, banks are the first place that entrepreneurs go when thinking about funding.

The bank provides two kinds of financing for businesses. One is a working capital loan, and the other is funding. Working Capital loan is the loan required to run one complete cycle of revenue-generating operations, and the limit is usually decided by hypothecating stocks and debtors. Funding from the bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned.

Get Business Loans From Microfinance Providers or NBFCs

A Non-Banking Financial Company (NBFC) is a financial institution that does not have a banking license but is allowed to offer financial products and services to customers. NBFC is primarily concerned with the business of loans and advances, acquisition of shares, finance leasing, hire-purchase, chit fund, etc. It is important to note that an NBFC is different from the bank in ways like an NBFC cannot accept savings and current account deposits, cannot issue cheques drawn on itself and its depositors do not get deposit insurance and credit guarantee coverage.

NBFC in India can be basically categorized into:

  1. Deposit accepting NBFCs

  2. Non-deposit accepting NBFCs

NBFCs in India are categorized into 10 forms that are mentioned below:

  • Asset Finance Company (AFC)

  • Loan Company (LC)

  • Infrastructure Finance Company (IFC)

  • Investment Company (IC)

  • Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)

  • Systemically Important Core Investment Company (CIC-ND-SI)

  • Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)

  • Non-Banking Financial Company – Factors (NBFC-Factors)

  • Mortgage Guarantee Companies (MGC)

  • Non-Operative Financial Holding Company (NOFHC)

Step 1: Register the company under the Companies Act 2013 or under Companies Act 1956.

Step 2: Minimum Net Owned Funds of the Company should be Rs. 2 crores or more.

Step 3: There should be at least 1 director in the company from the same background.

Step 4: Good CIBIL score is required to present in order to register as NBFC.

Step 5: Next, visit RBI’s official website and fill in the application form.

Step 6: Submit all the required documents along with the application form.

Step 7: Once you have submitted the application form, a CARN number will be generated.

Step 8: Send the hard copy of the application to the regional branch of RBI.

Step 9: After the application is checked and verified, the License will be given to the company.

NBFC’s in India are regulated by the Reserve Bank of India (RBI). As per RBI guidelines, an NBFC cannot carry on non-banking financial business if, a) it does not have a certificate of registration from the bank (except for the NBFC’s who are not regulated by the RBI), and b) it does not have Net Owned Funds of Rs. 2 crores.

An NBFC incorporated under the Companies Act, 1956 of Companies Act, 2013 willing to commence a business of non-banking finance should comply with the following RBI guidelines:

  • It must be registered under Section 3 of the Companies Act, 2013 of the Companies Act, 1956

  • It should meet the requirement of a minimum of Rs. 2 crores of Net Owned Funds (except for NBFC-MFIs, NBFC-Factors, and CIC)

Net Owned Funds can be calculated from the last audited balance sheet of the firm. Paid-up Equity Capital, Free Reserves, Share Premium Account Balance, and Capital Reserve will constitute Total Owned Funds. To calculate, Net Owned Funds, deduct Revaluation Reserves, Balance of Accumulated Loss, and the book value of Intangible Assets from Total Owned Funds. If any investment in shares of other NBFC’s or in debentures and shares of subsidiaries and group companies is in excess of 10% of the owned funds will be subtracted from the Net Owned Funds.

What do you do when you can’t qualify for a bank loan? There is still an option. Microfinance is basically access to financial services to those who would not have access to conventional banking services. It is increasingly becoming popular for those whose requirements are limited and credit ratings not favored by the bank.

Govt Programs That Offer Startup Capital:

The Government of India has launched 10,000 Crore Startup Fund in the Union budget 2014-15 to improve the startup ecosystem in India. In order to boost innovative product companies, the Government has launched the ‘Bank Of Ideas and Innovations’ program.

Government-backed ‘Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA)‘ starts with an initial corpus of Rs. 20,000 crore to extend benefits to around 10 lakhs SMEs. You are supposed to submit your business plan and once approved, the loan gets sanctioned. You get a MUDRA Card, which is like a credit card, which you can use to purchase raw materials, other expenses, etc. Shishu, Kishor, and Tarun are three categories of loans available under the promising scheme.

Also, different states have come up with different programs like Kerala State Self Entrepreneur Development Mission (KSSEDM), Maharashtra Centre for Entrepreneurship Development, Rajasthan Start-up Fest, etc to encourage small businesses.

SIDBI – Small Industries Development Bank Of India also offer business loans to the MSME sector.

In US, there is a small business lending fund and a dedicated portal for Government grants available for local businesses.

If you comply with the eligibility criteria, Government grants as a funding option could be one of the best. You just need to make yourself aware of the various Government initiatives.

Conclusion & Next Steps:

If you want to grow really fast, you probably need outside sources of capital. If you bootstrap and remain without external funding for too long, you may be unable to take advantage of market opportunities.

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