Did you know that 1 in 5 businesses fail during the first year? One of the top reasons new companies fail at an early stage is poor planning and low financing. When you do not have enough money invested at the right stages, your business will struggle to operate and be unable to make profits which can be cataclysmic for your business.
If you are thinking about starting a business or you are already knee-deep, financing must be one of your biggest concerns and you must know multiple ways to raise funds.
Apart from the capital required to start, businesses may need funding at various levels to expand, launch new products, or for investments and acquisitions. It is clear that financing and managing cash flow is the most important aspect of running a successful business. In this blog post, we will look at the best ways to raise funds for your business.
1- Self-Finance or Bootstrapping
When you are starting a business for the first time, the best option would be to invest some percentage of your own savings into it. Even if you were to approach investors and capitalists to raise funds for your project further, having your skin in the game can be an added level of reassurance for them to trust with their money.
Start with analyzing your assets and gain personal loans against them or convert them to cash by selling them. Another important source to raise funds includes your credit cards which can be used to make small transactions and when repaid in time can avoid extra interest charges.
However, you must know the terms of using credit cards and you should use your card wisely and should pay all your dues on time.
2- Business Loans from Banks
Banks are considered one of the top priorities for businesses and entrepreneurs as they are more convenient and reliable ways to raise funds. Loans can be available to business owners for expansion, starting a new venture, or buying new equipment.
Banks can provide different kinds of loans for different purposes. You can get working capital loans or term loans that can be repaid in regular payments over a short period. Letter of credit is another way used for import and export by businesses dealing with international trade.
You can use Bill or invoice discounting to get an advance amount at a discounted rate from the banks even before the buyer has paid the amount. You can also benefit from the overdraft funding type against collaterals like Fixed Deposits to withdraw cash from your account even with an insufficient account balance.
These loans can be utilized when in need of additional funds or to meet your daily business requirements, whether big or small. Almost every private and public sector bank offers business loans but the interest rates may vary from bank to bank. When you raise funds from banks you should try to negotiate the rate also. So that you can get the best deal.
3- Get Small Business Loans from NBFCs or MFIs
Microfinancing using collateral-free loans can be another great boon for small businesses to raise funds. Without the burden of having a good financial history or maintaining a healthy credit score, Non-banking financial companies (NBFCs) and Micro Finance Institutions(MFIs) can provide loans that can help entrepreneurs scale their businesses at a micro level.
4- Seed Capital and Angel Investors
When most banks and investors may be reluctant to provide loans in the absence of a financial record, many startups turn up to people they know for the initial seed funding in exchange for equity or profits in the business.
This can include friends, family, and individuals with surplus money who are interested in investing in your idea. This funding can cover the basic essentials of starting a business.
Sometimes professional angel investors who are usually high-net-worth individuals might help with the initial investment and offer guidance to build the business from scratch.
When Angel investors are ready to fund a big amount for high risk, they usually become a co-owner of the company with equity and even a share of stock options with voting rights. You can get in touch with these individuals directly for funding support.
5- Venture Capitals
While Angel Investing is done by individuals, Venture Capitalists belong to a firm that follows a more process-driven approach. While an Angel investor is good for starting a business, VCs can help scale an existing business since they have more to invest.
The capital comes from high-net-worth investors, investment banks, and other financial institutions that are managed by a firm to allocate funds as part of their investment portfolio.
Since small businesses can be high-risk, these funds are also given in exchange for equity. Some of the popular venture capital firms in India include Accel Partners, Sequoia Capital, and Nexus Venture Partners.
6- Government Schemes
You can also take advantage of the various schemes offered by the government to support small businesses and individuals who are engaged in trading, services, and the manufacturing sector. In the current scenario, there are various schemes that can help you to raise funds.
The Government of India has introduced many schemes for startups, MSMEs, female entrepreneurs, educated youth, and individuals belonging to the SC/ST category where they provide financial support, technical support, and other subsidies that can fuel their growth.
Some of these schemes include Pradhan Mantri Mudra Yojana(PMMY), Make in India, Stand-up India Seed Fund(SISF), Atal Innovation Mission(AIM), Venture Capital Assistance(VCA), and TREAD.
They can be availed from financial institutions like PSU Banks, NBFCs, Regional Rural Banks(RRBs), Micro Finacial Institutions(MFIs), and Small Finance Banks(SFBs). A government scheme may be one of the best ways to raise funds.
7- Startup Incubators or Accelerators
Collaborative programs such as startup incubators or startup accelerators can be very beneficial for new startups who would need help with workspace, mentorship, and seed funding.
These programs are usually conducted by non-profit organizations formed by governments, startup organizations, or other successful entrepreneurs whose sole purpose is to help new entrepreneurs to grow their businesses.
Being part of a good incubator program can give you access to bank loans and funds which are otherwise hard to get without collateral. Unlike other business funding programs, not all startups can benefit from this funding.
Entrepreneurs need to apply for these incubation programs and get selection amidst high competition. Here, funding is provided in exchange for equity or sometimes for a special program fee for mentoring.
8- Crowd Funding
Crowd Funding and cloud Funding are becoming increasingly popular among small businesses as these are convenient to raise funds, especially across the internet. This concept can be used to gather financing for first-time business owners and startups from multiple investors via social networking sites and other web-based platforms.
As long as you have legal compliances in place, you are free to send across your pitches, business plans, and your specific requirements on these social platforms.
Individuals and businesses can seek out financial help through these instruments to raise funding in form of donations or rewards.
While donation-based funding doesn’t have to be repaid, reward-based funding would require stakes like equity, debt, or digital securities to be given to the investor in exchange for the money pledged. Popular crowdfunding platforms in India include Kickstarter, Ketto, FuelADream, Fundable, Etc.
9- Funding Contests
A startup competition gives entrepreneurs a wonderful platform to pitch in front of investors and get a chance to win cash prizes and investments.
Many organizations conduct monthly or yearly competitions where you can get opportunities to network with other entrepreneurs and business partners, learn from industry experts and refine your ideas.
This way is ideal for students and young entrepreneurs to learn the ropes, practice early pitching before launch, and also raise funds for their dream projects. Here, you can pitch your ideas and keep them comprehensive enough to convince potential investors that your idea might be worth it.
10- Peer to Peer Lending to Raise Funds
Peer-to-peer lending is also a very common method for collecting funds for a business in its early stages, where no intermediaries are involved in the lending process.
Lenders give their money directly to the borrower who can invest in their startup without relying on a traditional financial institution. Since the interest rates are higher compared to banks, NBFCs, or MFIs, lenders consider this an investment rather than a loan.
These peer-to-peer lending institutions are usually regulated by the RBI for the benefit of both the lender and the borrower.
Undoubtedly, finance is very important for any business. Whether you want to start a business or scale up an existing one, cash flow, and financing are crucial for smooth running.
So, business owners need to understand how funding operates and also be aware of the different options available to choose from. As we have seen above, each mode of funding has its pros and cons.
Some are more secure than others; some require collateral while others don’t. There is no right way of gathering funds but only the smart way that is finding the right fit for your business.
If you bootstrap and continue for a longer period without external funding, you might be missing out on multiple market opportunities. So, if you are just starting, the best way is to initially invest your own funds and then adopt other methods mentioned above to access additional funds as you grow.