Different Types of Funding Sources for your StartUp, Different Types of Funding Sources for your StartUp

Different Types of Funding Sources for your StartUp

So, you have been finally bitten by the entrepreneurship bug and are just about to press StartUp button. Your next question is how you will raise the funds. There are many options to finance your business. We are listing all these sources for you along with their pros and cons so that you can decide which is the best option for you. You may also combine two or more to strike balance.

Different Types of Funding Sources for your StartUp, Different Types of Funding Sources for your StartUp

1. Self-Funding – Your own savings

This is the first option most of the entrepreneurs try.  So, if you are planning to use your own saving,

Pros:You can straightaway start your business without being answerable to anyone.

Cons:There is a risk that you will lose your hard-earned money if your business doesn’t do well. And, you will suffer guilt for burning your money.

Clever entrepreneurs never use their personal savings for their businesses.

2. family and friends

Next good option you can use is ask your friends or family members to fund your StartUp. You may approach your well to do relatives, uncle, aunt, grandparents. 

Pros: Your friends and family members want to see you successful and will not exert pressure for returning the money soon. This is a faster mode of finance too.

Cons: Family members’ decision to support you is rather emotional and not business like. You may not need to show any projections to them. But, if you fail, you may be subject to humiliation.

You need to make up your mind whetherthe money you are borrowing is a loan with interest or you are offering them equity. Give a timeline when you will be able to return the money and make them aware about any risks involved.

3. Crowdfunding

When a large number of people contribute small amount towards your business providing you with the capital to start your business or a project, it is called crowd funding.

Different Types of Funding Sources for your StartUp, Different Types of Funding Sources for your StartUp

It is mainly a form of social funding where you as an entrepreneur can post your funding requirement for a project, product development,event or a cause etc on digital crowdfunding platforms like Ketto, Wishberry, Fuel A Dream etc.  This will be available to the members nationally and internationally. You can share with your network of friends and family too.

Many people who connect with your dream will pledge their funds without any expectations of returns. Many of these platforms charge small commission fee.

Pros:Get a pool of investors in one place to fund or expand your business.

Cons:Crowdfunding can’t be your long-term funding solution.

In India, there is a trend of people more inclined to give to the social cause unlike other countries where crowdfunding for the business is a usual method.

4. Angel Investor

Angel investors are high net worth individuals who offer you funds in exchange of equity.

It is easier to get angel investors if –

  • Track record to show – If you have already started up and showing a growth sign tells your investors that you are serious.
  • A sharp Business Plan with clear timeline – to show to the investors that you mean business
  • Your Team Experience – Angel investors look for more experienced team. So, it will pay off if you can get a good team of 3-4 on board
  • Get advisors/mentors on board – This will help bring the investors’ fears down.

Pros:A Good funding method with flexible terms. Angel investors come with their wisdom and experience and will guide you as they have invested in you.

Cons:You will be answerable to your investors, so be ready to control your decision making. But, you can negotiate and be explicit about your decision making freedom with them.

5. Venture Capitalists

You can approach a venture capitalist in case your funding requirement is huge and you are looking for scaling up. In turn, you will need to give equity in your business and returns if you go public or another company acquires you. Venture capitalists will be interested in your business only if it has the potential to give good ROI

Pros:Venture Capitals are sharp business people who can mentor you in growing your business. Getting a venture capitalist on board will give your business credibility and limelight too. It opens doors to future funds.

Cons: As the funding amount may be significant, the size of equity will also be sizeable.

6. Get an SME Loan

It is a very good form of funding for you if you still fall under the category of MSME as government recognises that this sector needs special support to become viable. The Government of India provides MSME loan schemes to micro, small and medium enterprises under various MSME loan schemes. These loans are disbursed through schemes and incentive platforms such as Mudra LoanCGTMSE, etc.

Pros: Has longer than usual payback period.

Cons:For getting MSME has typical eligibility criteria. A lot of financial consultants, NGOs will tell you they can do the job for them in return they will charge a fee. But, it is better that

Different Types of Funding Sources for your StartUp, Different Types of Funding Sources for your StartUp

7. Bank Loan

You can also explore getting a bank loan for your start up. Before applying for a bank loan, it’s important to ensure that you are well educated about the various options available.

Pros:It is a fast mode of funding once you qualify. You will not lose any control on your business.

Cons:Loan has interest component and a pay back period in which you must pay back. You may need to pledge a collateral for security to the bank.

Bank loan application requires a lot of documentation and understanding of terminology which can be cumbersome. You many require help of a professional CA who will execute the job for you but will charge 1-2% of the loan.

8. Borrow from P2P Digital Platform

Peer to peer is a another good option for If you are not able to secure loan from the bank and time is running out you can try P2Ps. Digital Peer to Peer Lending platforms like Faircent and i2ifunding that connect individual lenders and borrowers allow you to borrow funds at low cost.

Pros: Very Quick process as compared to all above if your credit rating is good.Get funds at low cost interest rates.

Cons:You can’t borrow more that Rs.50,000 from a single lender across all the P2P Platforms.

You need to study all the above given funding options in detail, talk to your fellow entrepreneurs, discuss in forums before finally going for a particular funding option. Don’t depend on someone else completely but educate yourself well. After all, it is you who is responsible for the money.

Posted in Blog, Blog Categories | Evolvers, India.

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