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2016-01-08 00:00:00Funding & FinancingEnglishStartups cannot solely depend on traditional ways of raising finance to give wings to their ideas. This article covers ways for Business...https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2017/05/Funding-Financing-4-Overlooked-Sources-of-Funding.pnghttps://quickbooks.intuit.com/in/resources/funding-financing/business-startup-funding/Top 8 Ways For Business Startup Funding

Top 8 Ways For Business Startup Funding

10 min read

The number of startups in India have increased manifold in the last few years. As per Startup India’s data, there were around 8,625 start-ups in India as on March 30, 2018. However, out of these, a total of 2,711 start-ups were incorporated in the country in 2017.

Furthermore, the sectors in which these startups have been offering innovative solutions range from traditional sectors like financial services, retail and hospitality to upcoming sectors like healthcare, transport, hospitality etc.

Thus, the government has launched numerous startup funding schemes as well as undertaken other measures in order to provide a better environment for start-ups to function in India.

The World Bank’s “Doing Business 2018: Reforming To Create Jobs” report has placed India on the 100th position in its Ease of Doing Business Global Rankings. In the Last Year’s report, the World Bank had ranked India at 130.

Such a significant shift in position is a testimony that India adopted best practices in order to improve its business regulations.

However, as per a report published by PwC, getting access to finance specifically in the early stages of growth is still a matter of concern for start-ups.

Bank lending to start-ups remains difficult due to the inherent riskiness in start-up business. Equity financing also is quite challenging due to the existence of risk aversion among institutional and other investors.

Therefore, start-ups cannot solely depend on the traditional ways of raising finance in order to give wings to their ideas. They need to be aware of the alternative sources of finance as well so that the challenge of raising finance in the initial stages of growth does not become a roadblock.

This article covers a few of the substitute ways for Business Start-up Funding .

1. Crowdfunding

Definition

As per IOSCO, “Crowdfunding is an umbrella term that describes the use of small amount of money obtained from a large number of individuals to raise funds for a project, business or other financing needs through online, web – based platforms.

Similarly GPFI defines crowdfunding as “ a market based financing technique where funds are raised from a large number of individuals or legal entities in small amounts bypassing traditional financial intermediaries and using mobile phones and online web based platforms to connect with borrowers whether to find a business, a specific project or other needs.”

Thus, crowdfunding tabs the savings or resources of a vast community. Furthermore, it brings together the individuals or entities who are in need of funding and the community members who are willing to contribute. Global financial crisis gave boost to the crowdfunding industry as the confidence in the banking sector reduced significantly at that time. Since then the crowdfunding industry has been growing rapidly and is driven by technological, macroeconomic and regulatory factors.

Crowdfunding Platforms:

Kickstarter, Indiegogo, GoFundMe, Patreon

2. Venture Capital

Venture capital is a type of private equity capital. Such capital is typically provided by wealthy investors, investment banks and other financial institutions to startups and small businesses. These businesses undertake ventures that involve high risk but have strong potential for growth.

Venture capital is not just restricted to introducing funds. It also includes setting up of the venture and providing technical and managerial expertise. However, the major disadvantage of getting a venture capitalist on board is that he gets a say in the company in addition to an equity share.

Furthermore, venture capital is not long term in nature. The very objective of such form of capital is to invest in the idea of the entrepreneur and cultivate the same. Such nurturing is done until the idea becomes big enough that it is either sold to a corporation or funded via equity markets.

Venture Capital Firms (India):

Canaan Partners, Nexus Venture Partners, Helion Venture Partners, Mayfield Fund

3. Angel Investors

Sourcing for funds is part of good financial management in a startup. Funding is essential when you start a new small business, and sometimes, it can feel like you need a miracle to help your business survive. That’s where angel investors come in.

An angel investor is an affluent individual or group who invests capital in a company at an early stage, much earlier than a venture capitalist (VC), typically in return for equity.

Named after the mythical creatures who often watch over and protect people, angel investors put money into startups in exchange for a small stake in the company. Hence, start-ups put in a lot of effort to attract angel investors to fund their business ideas.

Angel investing has helped many Indian businesses, like e-commerce company Myntra and taxi service OlaCabs, take off.

To support the growing number of startups in the country, there are a number of angel investors and platforms that are a part of Angel Investors India Network.

Angel Investors (India):

Angel Network, Mumbai Angels, Let’s Venture etc.

4. Government Schemes

Micro, small and medium enterprises (MSMEs) have been key contributors to India’s economic growth. Despite its significant contribution, the MSME sector gets the least share of the organized lending. Hence, to give a further boost to the MSMEs, the government of India rolled out loan schemes schemes for small businesses. Few of these include:

  • MSME Business Loans in 59 Minutes
  • Pradhan Mantri Mudra Loan Yojana (PMMY)
  • Credit Guarantee Fund Scheme for Small Industries
  • Credit Linked Capital Subsidy Scheme For Technology Upgradation (CLCSS)

MSME Business Loans in 59 minutes is an online marketplace that enables approval for MSME loans upto Rs. 1 crore in 59 minutes from SIDBI and five Public Sector Banks. The web portal has reduced the turnaround time for loan processing to just 59 minutes. This was earlier limited to 20 – 25 days. After the receipt of the in principle approval letter, the loan is expected to be disbursed within 7 – 8 working days.

The, in order to support micro entreprises, the government of India established Micro Units Development and Refinance Agency Ltd (MUDRA) in the year 2015. Such a financial institution was launched to support banks, microfinance institutions, NBFCs and other lending institutions that are in the business of lending to micro entreprises.

Further, the government of India launched the Credit Guarantee Scheme. This scheme was launched to avail bank credit to the young entrepreneurs without any collateral or third party guarantees. Further, this scheme intends to provide credit to the MSE sector without the hassle of any collateral or guarantee and give wings to their dream of setting up a unit of their own.And to implement the scheme, the government of India and SIDBI established the Credit Guarantee and Fund Trust for Micro and Small Enterprises(CGFTMSE).

Lastly, to help SSI units upgrade technology, the ministry of SSI units introduced the Credit Linked Capital Subsidy Scheme. Under this scheme, the SSI units are provided upfront capital subsidy on institutional finance for modernization of their equipment and techniques.

5. Bank Loans

Small business needs financing for a variety of reasons. Depending upon the need, the growth stage and the nature of your business, there are different types of business loans that are disbursed by commercial banks. Each loan type has its own qualification requirements, rate of interest and terms of lending. Furthermore, each type of business loan is crafted to cater to your specific business needs and help you plan disbursements accordingly. Broadly, following are the types of business loans that you can seek:

  • Term Loans
  • Working Capital Loans
  • Bank Overdraft
  • Personal Loans
  • Supplier Cash Advances
  • Invoice Factoring

The term loans are secured loans offered to businesses for their expansion, capital expenditure and for fixed assets. The duration usually extends to a long period that ranges between 5 to 10 years.

Working Capital Loan is a short term loan that helps in financing the day-to-day operations of your business. Such operations can include managing payroll, paying rent, purchasing inventory, procuring raw material, maintaining cash etc.

A bank overdraft facility allows its customers to borrow a set amount of money on one’s account. Such an amount is granted based on the borrower’s account value, credit score and repayment behaviour.

Personal Loans are unsecured loans that do not require any collateral in order to receive funds from financial institutions. Such a loan helps an individual in meeting his personal expenses like higher education, wedding, house renovation etc.

Supplier Cash Advance requires the buyer to make payment before the actual delivery of goods and services. The balance amount of the payment is thus made once the goods or services are delivered to the buyer. Thus, it is common for the sellers to ask for advance payment for the goods or services to be sold by them. This helps the sellers to get credit in order to meet the operational expenses of the business. Furthermore, it also helps the sellers to cover the risk of non-payment by the buyer at a future date.

Lastly, in order to raise finance in the form of working capital, a growing number of companies have started using factoring as a source of finance. Invoice Factoring is the process of selling accounts receivable of a business unit to a third party, financial company.

6. Business Line of Credit

Line of credit is basically an agreement between a financial institution and the borrower. Accordingly, the lender agrees to lend a maximum amount of money to the borrower depending upon his credit worthiness. Under this facility, the borrower can withdraw the money as and when there is a need. However, such a withdrawal cannot exceed the maximum limit disbursed.

Accordingly, the interest is charged only on the amount borrowed and the amount that stands unutilized does not carry any interest.

7. Equipment Financing

Every business needs to either upgrade or invest in new equipment to carry out business operations. Purchasing an equipment outrightly puts a strain on the cash flows of your business. Hence, to avoid such a scenario, equipment financing comes handy.

Equipment financing refers to a loan used to purchase business-related equipment including computers, machinery, vehicles etc. Under such an arrangement is borrower is required to provide periodic payments that include interest and principal over a fixed term. Furthermore, to secure the loan, the lender demands a lien on the equipment so financed as the collateral against your loan. Once you pay the loan in full, you own the equipment free of any lien.

8. Business Incubators and Accelerators

As per the data put together within Department of Industrial Policy and Promotion, India has more than 270 incubators and accelerators. These incubators and accelerators are managed by academic institutes, corporates, private players and government. As per a study by NASSCOM in 2017, 40% of all the incubators and accelerators are confined in Bengaluru, Mumbai and Delhi NCR.

Incubators are organisations that speed up the growth and success of startups. They provide funding and differ in their strategies. Incubators provide entrepreneurs with the ability to learn, promote networking and act as coaches. Your small business gains from seed funding, training and financial and legal services. Incubators are also known as Accelerators as they can jumpstart your business.

Several Indian incubators continue to assist in the growth story of startups across India.

Business Incubators and Accelerators

Indian Angel Network(IAN) Incubator, Khosla Labs, Villgro, SeedFund and Chitkara Innovation Incubator.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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