Tying your assets in one place is never a decent business technique. This is particularly obvious when it comes to financing your new business. When one considers trying to raise funds for a startup, it is quite a difficult task, and so owners should keep all their options open while looking at financing and not be fixed at a specific source.
Different businesses have different needs. Also, some startups may be small and so may not require a lot of funds or resources, while others may have operations that may require them to raise more funds. So, there are different factors that affect the owner’s choice of selecting a suitable source of financing.
Regardless of whether we choose a bank advance, a venture capitalist or a government grant, each of these sources of finance has points of interest and explicit impediments.
8 Sources of Startup Funding:
Startup owners can use various sources of financing to acquire funds for their business. These sources are popularly known as the startup funding sources.
1. Personal sources
Personal sources for funding means using personal funds to invest in one’s business. It is broadly classified into:
This is a method of self-funding for the startup. The owner uses his/her savings and invests it in the business either by using his/her savings or by using any credit cards that he/she may have.
The advantages of this method of funding are that the owner saves time and effort by not having to ask other investors. Another advantage is that the owner does not have to give up any control over his business. Self-funding also shows the level of commitment and belief that one has for their own venture.
Borrowing from our inner circle is also a way to tap one’s personal sources. Doing so might result in more flexible terms of loans than a loan, and it might be quicker and cheaper for the owner as well.
2. Equity Financing
Equity financing is done when the owner is ready to relinquish a part of his/her ownership in exchange for the funds. This type of financing may include borrowing from family and friends and might extend to an IPO as well. The main disadvantage of this source of funding is that the owner has to give up a stake of his company.
3. Angel Investors
Angel funders are usually wealthy people or managers of resigned organizations who place directly in small businesses owned by others. They are often pioneers in their own field, who not only contribute their experience and contact system but also with specialized or potentially executive information.
Angel funders usually fund business start times with interests in the $ 25,000 to $ 100,000 solicitation. Institutional financial speculators are leaning towards larger ventures, on the order of $ 1,000,000.
They are usually motivated by the high growth potential that a company may have and their ability in providing mentorship and resources. They also have a sense of giving back to the entrepreneurial community, and that is why they undertake such risky investments.
The main advantage of having an angel investor is that one can get good resources and contacts. The mentorship and knowledge that is accessible can be very beneficial for the startup owner and his/her team.
4. Venture Capitalists
Venture capitalists are very much like angel investors, but venture-capitalists firms are a structured team of people while angel investors are only individuals.
Venture capitalist firms often look for startups that have the potential of providing high returns. These startups, however, also involve very high risk, and that is why venture capitalists also require high control in exchange for their investment.
As the returns increase, so do the stakes in the company. Many entrepreneurs look for venture capitalists when the options of traditional methods of financing run out.
5. Business incubator
A business incubator provides support to the startup at all stages of development. Incubators do not necessarily provide any direct startup funding, but they provide a lot of operational and logistic support.
This support is provided in the form of shared working premises, mentorship from local community experts, and even sharing of some technical and administrative resources.
An owner may use this source of funding in their initial phase of a startup when they do not have sufficient resources to have their own workspace. For example, someone may use the co-working space of an incubator to test their product before launching it in the market and after having done so, may move out of the incubator space.
These are mostly run by government agencies, universities, professional agencies, companies, etc. and in that sense, they can be really advantageous to small business owners as they provide relevant resources that can greatly help in reducing costs. The consultancy provided by experts can also be quite beneficial.
6. Government funding and grants
Governments are always looking at encouraging innovations and startups by providing them subsidies, grants and loans. Such funding is provided by both the Central Government and the respective State Governments. Most of the time, people are not aware of such schemes, but they can be a good source to raise funds for startups.
Many government organizations also have certain awards and donations that business owners can access. The competition for such awards and donations can sometimes be difficult to obtain since the competition is really fierce; however, it can be really beneficial.
In India, the government is really trying to push the ‘Startup India’ Campaign and the ‘Make in India’ Campaign. Due to this, there are many schemes available to startup owners.
The Government of India also started the MUDRA loan scheme for micro/small enterprises that provides collateral-free loans. Apart from that, a lot of subsidies and grants are also provided to companies that are in the technological areas and who set up industries in rural areas.
7. Bank advances
Bank advances are the most widely used source of funding for small and medium-sized organizations. They offer loans to startup owners.
In order to get the loan amount, owners have to prove to the banks the viability of their business idea and show historical records of their business (if any).
An advantage of bank loans is that no equity has to be given up, but the rules of the banks are not very flexible, and interest payments have to be made regularly and on time. The rates of interest might also be high in some cases.
Crowdfunding is an alternative source of raising funds for startup. Here small amounts of money are raised from a large number of people by pitching and explaining one’s business idea to them.
This source has become quite popular in today’s times as it usually takes place on digital platforms on the internet. There is usually a third party that brings all parties together.
For example, a website on the internet can be used to raise funds for a project or business idea.
Selecting the Correct Source to get Funding For Startups
In the present scenario, there are a variety of startup funding sources available to choose from. Financing a startup has really evolved. In the past, people usually used their own savings or borrowed from family members, but now there are many alternatives to the traditional methods of financing.
One needs to choose based on the needs of their startup and considering the scalability and feasibility of all factors. So, making the correct choice for startup funding sources becomes really important.
A lot of thought should be given to this decision so that the correct source is selected and the business is facilitated.