Too much has been written about the different ways to raise funds for startups or small businesses. And yet, many budding startups fail to get the right funding at the right time. This can be majorly attributed to the lack of knowledge about the various funding sources available in the market today. In this blog post, we discuss the 9 most common and effective ways to raise funds for your startup today. Read along!
What Are The Different Ways You Can Raise Startup Funding?
When we look at funding for startups, or any business, there are two broad ways to go about it: Equity and debt financing. In simple terms, equity financing involves giving away a part of the business’s equity to the lender, while debt financing is borrowing capital from the lender and repaying it over a period of time. Here, we cover both equity financing and debt financing options for you to choose from.
What is it: Bootstrapping is the type of funding for startups where the business owner starts and grows the business from scratch using their own savings. Some of the most notable bootstrapped empires in India are Zoho, Zerodha, and GranOn.
What are its pros: When you choose to bootstrap your business, you get a lot of control in the decision-making process in the business. You get to take complete control of the day to day operations, and there is no equity dilution. There is very little to no debt when you decide to bootstrap your business.
What are its cons: Bootstrapping can end up being extremely stressful if you don’t plan each move meticulously. You’re at higher risk of running out of your savings and, in turn, shutting down operations. While we love bootstrapped startups, it is also true that your business growth might be slower due to a lack of enough working capital. In such cases, revenue-based financing provides you with the funds you need to grow while having complete control over your business.
Friends and family
What is it: As the name suggests, friends and family, as a source of funding, is when businesses tap into their closest friends and family to raise funds. This comes in handy during the earliest stages of a business when the entrepreneur hasn’t built their credibility yet.
What are its pros: When you fund your startup using capital from friends and family, there are minimal ‘legalities’ involved. They lend you money based on the relationship you share with them and their trust on you and your idea. You wouldn’t have to go through multiple rounds of grilling, unlike with any institutional lenders. The repayment tenure is also highly flexible (depending on your rapport).
What are its cons: Since they are your friends and family, the chances of you not taking the repayment seriously are slightly higher. However, this is a highly risky source of funding as it involves money from your circle, and defaulting on repaying it on time can strain your relationship with them. The chances of them ‘showing extra interest’ in your business because they have invested in it are also high.
What is it: One of the most rapidly spreading ways to raise funds for business today is crowdfunding. It is the process where the entrepreneurs can register themselves in crowdfunding websites and appeal for their business to be funded.
What are its pros: Leveraging crowdfunding lets you tap into a large pool of individuals who are curious about your business. It also creates a platform for you to test your product with folks who are interested. You get to have all your potential investors in a centralized platform if you’re doing it via an accredited website. Crowdfunding also doubles as a marketing technique.
What are its cons: The biggest disadvantage of crowdfunding is that there are a plethora of ‘unique ideas’ seeking to get funded, and you might just get lost in the crowd. There is no specific time period by when you will get the funds, and you wouldn’t be able to determine how much funding you can expect for sure.
Some of the popular crowdfunding websites in India are TheHotStart, Indiegogo, Start51, GoFundMe, Wishberry, and SeedInvest.
What is it: Angel investing is the type of funding for startups where a wealthy private investor, or group of investors, funds a startup in its initial stage of development in exchange for equity in the business. These investors are known as business angels or angel investors.
What are its pros: Angel investors are known for their huge appetite for risk as they invest in the earliest stages of your startup. They are also highly influential, and so, can get you in touch with other influential people, or even your future investors. Their experience as entrepreneurs can come in handy for your business’ growth.
What are its cons: Since angel investors are investing their own money, the capital can be limited. Additionally, they expect a part of the equity in your business in exchange for their investment. Angel investors have aggressive goals and expectations from startups despite their huge risk appetite. We have collated a list of 25 most active angel investors in India for you in this article here.
Accelerators and incubators
What is it: Startup accelerators provide startups that already have a minimum viable product (MVP) with the education, resources and mentorship needed to grow rapidly. Incubators, on the other hand, nurture and mentor startups over longer periods of time. They provide an environment of collaboration and support when needed.
What are its pros: Accelerator and incubator programs open the floodgates to an ocean of knowledge that can help catapult a business from scratch. They help gain massive connections in the business world. The programs by accelerators and incubators also pave the way to getting introduced to potential customers.
What are its cons: While these programs can bring in networking opportunities, they can often be intense for a novice entrepreneur. Getting an accelerator to even notice you can be hard due to the immense competition.
Some of the most popular startup accelerators and incubators are 500 Startups, TLabs Startup Accelerator in India, Cisco Launchpad Startup Accelerator in India, and Indian Angel Network Startup Accelerator in India.
What is it: Venture capital or VC funding is a type of financing that involves investing capital in startups or businesses with a minimal operating history but a high potential for growth in exchange for equity. VC Funds typically come from institutional investors and high net worth individuals and are pooled together by specialized investment firms.
What are its pros: One of the most significant advantages of venture capital funding is the amount that can be raised. Investors tend to fund capital depending on the startup’s needs. There is a strong support system that the entrepreneur can lean on when needed. It not only provides great exposure, but also comes in handy to raise future funding rounds.
What are its cons: The biggest drawback of venture capital funding is that you end up losing a major share of your equity to the VC firms. Finding the right venture capitalists can also be tricky. The process is tedious, and can take up most of your time.
What is it: The Government of India (GoI) has been providing considerable support and funding to startups that are looking to develop, expand or start new operations in India. This support is available in the form of financial assistance and tax benefits through a number of schemes aimed at supporting entrepreneurial efforts and creating employment opportunities.
What are its pros: By leveraging the various schemes by the GoI, startups can get massive tax benefits. For example, startups will be exempted from income tax for 3 years provided they get a certification from Inter-Ministerial Board (IMB).They also get loans from banks at subsidized interest rates.
What are its cons: Since it is a GoI initiative, the legalities are aplenty. Understanding the same can take up a considerable amount of time. The chances of corruption in the process are also high.
What is it: Startup loans are loans provided by financial institutions to businesses for a promise to repay the capital in the future, along with the interest the institution decides. Businesses may use this loan as working capital, for meeting short-term cash-flow requirements, purchasing the plant, and machinery, etc.
What are its pros: Leveraging a bank loan is typically debt financing; therefore, you do not have to dilute your equity.. It also presents an opportunity to increase your credit score significantly, provided you repay the loan amount on time. Since you would be taking a loan, you will not be losing any of your personal capital. If you are opting for unsecured business loans (collateral-free loans), you don’t even have to pledge any security to get the loan.
What are its cons: Qualifying to get the startup loan can be hard. Banks usually tend to have stone-carved eligibility criteria that you must meet. The interest rates for loans vary, and can be exorbitant if the institution feels your business is risky. You will have to repay the loan on a monthly basis, which can affect your cash flow. If you default on the repayment, it can have drastic effects on your credit history.
Merchant Cash Advance
What is it: Merchant cash advance (MCA) companies provide funds to businesses in exchange for a percentage of the businesses’ daily credit card income, directly from the processor that clears and settles the credit card payment. The quantum of the loan is dependent on the volume of your monthly card sales value.
What are its pros: Merchant Cash Advances are one of the quickest ways to fund your startup. Lenders are more interested in the future of the borrower’s business and not the past. So, your credit history wouldn’t be a blocker. MCAs are usually collateral-free, so you don’t have to put up any security.
What are its cons: MCAs can have annual percentage rates (APRs) as high as 350%. While MCAs can help solve temporary cash shortages, it’s not a long-term solution. Merchant cash advance lenders operate in a largely unregulated market, which enables them to charge hefty interest rates.
The list doesn’t end there. There are other options like invoice financing, business credit cards, and more that help startups raise capital. However, they are not without significant disadvantages that can negatively impact a business’ growth.
The Experts at Velocity Recommend Revenue-based Financing
If you are looking for a flexible, highly scalable, 100% digital process of raising funds that require no equity dilution, we recommend revenue-based financing (RBF).
Revenue-based financing is a way that firms can raise capital by pledging a percentage of future ongoing revenues in exchange for money invested. Revenue-based financing is relatively cheaper than equity financing options available in the market. RBF investors would not take board seats or place difficult financial covenants on your business. Since the repayment is based on the turnover, in case you are having a bad month, you have the flexibility of repaying a smaller amount. It doesn’t end there!
Revenue-based financing has a host of benefits for startups that have a decent turnover and are looking to grow their business.
You can learn more about revenue-based financing in our ultimate guide to revenue-based financing.
Being India’s largest revenue-based financier, Velocity provides founder-friendly revenue-based business loans to growing DTC businesses. If you are a D2C brand looking for funding to manage your inventory and marketing needs, apply here, and get funded within 7 days.