Funding Options for Startups

12 Funding Options For Your Startup In 2020

At some point in life, we do come across an idea that is unique, original, innovative and ‘Your Baby’- YOUR BUSINESS. But the reality dawns when we want to put our dream into action.

For any Startup, the foremost requirement is the funding of the project. As they say’ You need money to make more money. The basic funding needs to be generated to deal with the inventory and expenditures of the startup.

To help us glide through this mammoth task, we need to explore the multiple funding options available to us. Listed below are the options one can use to generate capital for a startup.

A NASSCOM report suggests that more than 1200 Startups came into being in the year 2018. Let’s discuss these funding options in detail.

12 Funding Options For Your Startup In 2020

Banks

The first option that comes to any entrepreneur’s mind for his/her startup is borrowing money from banks. Financial Institutions have special schemes specifically designed to help startups gain momentum. Though there are numerous clauses and demands by the banks, loans are offered under two categories: Personal and Collateral. Personal loans are unsecured without collateral or security. Banks track your income, cash flow, strength and ability to be able to repay before offering a loan.

Collateral loans are secured loans. For this category of loan, you need to offer an asset of parallel value to the bank or financial institution. Collateral includes property, houses, stocks, bonds, cars basically all things which can readily be converted to cash to repay the loan.

In both the above cases, only if you’re already in a stable position financially will the bank offer a loan to your startup.

Startup India is a scheme by the Government of India to assist new enterprises financially in this category. The program not only helps with financing but also with options for income tax exemption, fast track patent application, public procurement among many other benefits. Here you go: https://www.startupindia.gov.in/

Family and Friends

This option of borrowing money for a startup can be easy yet encompassing a big risk with it. It’s a common saying that never does business with family and friends, as either you’ll win both or lose both. Family and friends with a stable financial background are a good source to be explored for startup funding.

Explain your business plan in detail with all the risks. The key here is being professional and honest with your family and friends. The biggest advantage of this type of loan is that it can be interest-free. For making it official, a lawyer can be hired to prepare legal authentic documentation stating the clauses of repayment of the borrowed amount. The constant progress of all business development needs to be conveyed to all. Once the business begins to earn a profit, incentives can also be shared with family and friends.

Angel Investors

Affluent individuals who provide capital for the startup business are qualified as Angel investors. A detailed, viable and well thought of business plan is the key to gain this category of funding for a startup. Alternatively, a group of people come together and create a ‘ fund pool’ to invest in a lucrative business venture. Even they are called ‘Angel Investors’-true to their name, they run a high risk of investing their money in simply a PLAN.

According to a report by Forbes magazine, $1 Billion is invested in Startups in the UK every year by Angel Investors. Virginstartups.org by Richard Branson supplements this data. In return for their investment convertible debt or ownership-equity is provided to the Angel investor.

Self-funding/bootstrapping

Bootstrapping means using your money to run your business. This funding involves starting from scratch. Hard work, sacrifice, and dedication are the keys to success with this funding, as it is your own money. This will ensure a complete organic beginning for your startup. The best thing about this is that it involves no loans, you owe no one anything. You’re your own boss! Isn’t that the goal?

But this also implies that you get no salary. Business is funded by the owner or founder until it begins to show profitable returns. So, basically, the company’s revenue is reinvested in the company as it’s capital making the company tick. The so-called- ‘Self-made-men’ category of entrepreneurs belongs to this category of funding. Research and analysis have to be perfect to be able to hit the nail on target.

Once the company grows, networking helps it to be seen and heard in the business circles. It’s then that people gain confidence in the company and they are keen to be a part of the endeavor.

Crowdfunding

As the name itself suggests crowdfunding can be described as a funding option for startups where many people fund a business project by contributing small amounts of money. The generation today survives on technology and crowdfunding uses this sphere of going online to reach out to the masses.

With the assistance of the internet, it is easy to attract crowds through social platforms like Facebook. These platforms help spread the word. Your business strategy suddenly becomes viral where everyone wants to be a part of it. To lure more people to invest, rewards and benefits are promised.

Accelerators

The role of Accelerators in funding a startup business is to give an instant boost and rapid growth to the project as initially, business lacks marketing, customers and suffers from low networking. Accelerators take a nominal fee or equity proportion in lieu of the services provided by them.

They provide business mentorship, guidance, legal and management services to help increase the existing businesses’ network and make the business more reachable. The timespan of their attachment to the startup is not more than 6 months.

Incubators

In comparison to Accelerators, Incubators are involved with the startup business for a longer period. Their assisting term varies between 1 to 2 years. In return, the Incubators don’t accept any fee or equity These are free services provided to the startup business. They provide the business with marketing and financial services, access to strategic partners and technical assistance.

There is high competition in this category of startup funding as it involves no fee. These services are provided by highly affluent and influential people and wealthy entrepreneurs. One has to prove oneself worthy to be getting assistance in their startup by an Incubator. For this, an excellent business plan and model is an essential requirement.

Venture Capitalists

These are high net worth individuals who have surplus money and come together to invest. They form an organization called VC fund. Certain banks and financial institutions also come under the category of VC’s. Venture Capitalists help individuals who have a startup business idea but no money. They locate such people and help their idea in marketing, research and getting it operational.

VCs don’t take security against the money they invest but they become partners in the company. They don’t take interest but take their share in profits. VC’s don’t usually stay in the company forever. They recover their investment along with the profits and exit the company selling their percentage of partnership back to the owner.

Seed Funds

Just like a seed needs the right environment to sprout, a startup needs the right funding to bloom into a profitable venture. Seed funds can be qualified as a basic amount required by a startup to begin its journey. State Governments offer various schemes to help startup businesses by giving Seed capital. The main objective of these schemes is to motivate young enterprising entrepreneurs to establish themselves and in return help generate employment and an increase in the state economy.

Grants

This is a strenuous procedure to generate funding for a startup. There are multitudes of people wanting finances for their startups through grants. Startup business grants are available from the government and private sectors. Specific grants are available depending on the specialization of the business model. Startups not only requires financial support but knowledge support as well.

TePP ( Technopreneur Promotion Programme )is a Government of India initiative to provide funds for ventures related to science and technology. MGS supports funds for industries of IT, Artificial Intelligence and analytics.

Partner Financing

Finding a partner for your startup who is willing to stake finances in your business is known as Partner Funding. Your brilliant business plan lacks the required assistance of manpower, extra funds, a large contact list and proper execution of your plan. Doing it alone is always not possible.

A partner who has an equal stake in the company will share the responsibilities of running the business efficiently. In Partnership funding, the load of the startup is equally divided among 2 or more partners. Trust, honest involvement and mutual respect for each other works wonders in the success of such a startup.

NBFC

These Non-Banking Financial Corporations are a parallel source to bank funding. It is a company incorporated under the Company’s Act 2013 or 1956. Their job is to provide loans and advances to startup businesses. NBFC is governed by the Ministry of Corporate Affairs as well as RBI.NBFC raises funds from the public directly or indirectly. Moreover, NBFCs are gaining recognition due to their customer-oriented services, better rates of return on deposits and flexibility in timelines for creditors.

That being said, procuring funds is a task initiated with a decision. This decision entails factors such as need, risk, expertise, research & most importantly, innovation. An IBM research suggests that 90% of Indian startups fail due to a lack of innovation. Let’s face it, we live in a fast-changing world. Any idea that you come up with, has in all likelihood crossed a few other minds. It is about adding value. That comes with innovation and vision. You either make something useful and new or do it better than the others.

Use these 12 funding options to get funding for your business.

If you want to know more about the Indian Startup Ecosystem, read our blogs.