How Do I Raise Capital To Start A Business?
Most start-up businesses fail during the first few years of commencing operations. Shortage of funds is one of the most common factors behind it among other reasons. Capital is the essential aspect of converting a business idea into a revenue generating model. Entrepreneurs, usually find it difficult to get a start-up loan for new business, as investors are sceptical about funding businesses that haven’t started generating revenue yet.
Bootstrapping or self-funding is a cost-effective way to fund your business start-up. You might choose to invest your own savings or ask your family and friends to contribute. This is done by many start-up entrepreneurs as there are less formalities. An interest can be offered to your family and friends to make it a financially sensible investment. Also, the risks involved must be explained to them in detail.
Recent times have seen a change in the traditional ways of funding. Crowd-funding is one such new concept which has gained popularity among people seeking business loans for their start-ups.
How it works – An entrepreneur enters the details of his business on a crowd-funding platform. These must include all details necessary like, business goals, revenue generation models, amount of funding needed, etc., to help investors make a decision about funding the business. These investors can choose to invest a small part of the amount required by you or make an online pledge of pre-buying your product.
Apart from helping you get funding, these platforms are also a great way to create a buzz about your upcoming business and understand the demand your products may eventually generate.
Angel investors are individuals with surplus cash and a keen interest to invest in upcoming start-ups. They also work in groups of networks to collectively screen the proposals before investing.
Just to cite some examples, companies like Google & Yahoo started with funds from Angel investors. These investors expect an equity in your business in exchange of providing the funds. They are willing to take higher risks too if the returns look promising.
Business Incubators and Accelerators:
Start-up businesses in India have started considering Incubator and Accelerator programs as a funding option. These programs assist start-up businesses in most major cities to gather momentum. Incubators nurture the business providing tools, training and network to businesses. Accelerators more or less the same thing, but unlike incubators, they help the business grow. Having an approximate time commitment of 6-8 months, these programs also help entrepreneurs develop connections with mentors, investors and fellow start-up entrepreneurs.
Of course, this is the first option that comes to mind when you think of a business loan. Banks provide two kinds of financing; Working Capital and Funding. Working Capital is provided to manage a specific aspect of your business, while funding involves the process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned. With the government trying to grow the SME/MSME sector in India, most banks are providing business loans to start-ups through various programs.
Microfinance Providers or NBFCs:
Microfinance is basically access of 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 favoured by bank. NBFCs are Non-Banking Financial Corporations that provide services similar to banks without the legal requirements of a bank.
The Government of India intends to build a strong eco-system for nurturing innovation and Start-ups in the country that will drive sustainable economic growth and generate large scale employment opportunities. There are eligibility criteria for availing funding under these programs. However, 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.
It is important to realize that while these options are available to help start-up business get a foothold in the market, understanding, assessing and looking for suitable funding options is critical for the success of the business.