- Date : 24/11/2021
- Read: 5 mins
Discover some of the most common financing options for new businesses.
While COVID-19 made life difficult for businesses overall, it didn’t seem to hamper the entrepreneurial drive of many Indians. Every month, the number of newly registered companies kept increasing. The stay-at-home environment had clearly kindled a spark in the minds of many businesspersons, who ventured into producing goods or providing services in response to the pandemic situation.
If you, too, are considering exploring new business opportunities, you might be wondering how to raise the capital needed. As a newly minted entrepreneur, there are several ways of funding your dream venture. Let us look at some of the most common financing options for new businesses.
Bootstrapping a business refers to funding it yourself with the money you have saved over time. It is quite advantageous for new businesses since securing a loan without existing traction is quite difficult. Many people prefer bootstrapping since it does not put any debt obligations on the new business. But one major drawback of bootstrapping is that you stand to lose a lot on the personal front if the business does not take off. However, if your venture does not need heavy investment right from the beginning, it might be a good option.
2. Angel investors
When you approach angel investors, it does not become a loan for your business; instead, the investors get part equity or convertible debt. Angel investors are essentially high net worth individuals (HNIs) who fund your venture if they believe in your vision. These people have deep pockets and can either invest heavily once or continue infusing funds regularly.
Besides monetary support, angel investors often offer business advice as well. These are typically business people who have gone through the same phases as you, so they are qualified to offer guidance.
Crowdfunding involves collecting funds from several individuals at the same time. You need to design a proposal detailing everything an investor should know. Then, potential investors can decide whether they find it worth investing in or not. This method of raising funds has gained much popularity recently.
There are several crowdfunding platforms you can check out. These platforms may offer reward-based options or peer-to-peer lending. Under a reward-based plan, you offer your investors rewards instead of paying back their money. However, peer-to-peer lending works much like loans, and you have to repay the amount raised.
4. Venture capitalists
Venture Capitalists (VCs) are typically firms that invest in early-stage startups that are deemed to have considerable growth potential. VCs are professionally managed by people that offer not just money but also their expertise. These funds typically invest in innovative and risky businesses in exchange for part ownership or equity.
VC funding usually happens after a business receives initial funding and is meant to grow the business further. In most cases, your VC will be monitoring your activities closely, and you need to be on board with that.
Taking a loan from a bank or an NBFC is a traditional way of raising funds for your business. These institutions grant money in the form of debt and do not get any ownership. Your loan application is judged on several parameters such as expected returns, collateral, management expertise, etc., before it is accepted or rejected. As a new business owner, you can apply for either a term loan, working capital or an asset-backed loan.
6. Government initiatives
The Government of India has launched several initiatives to help new businesses obtain the funds they require. One such scheme is the Startup India initiative. Under this scheme, the government has set up a Fund of Funds to empower new businesses and nurture them. The Small Industries Development Bank of India (SIDBI) is responsible for disbursing the funds.
The Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) is another scheme for encouraging entrepreneurs. Under the initiative, businesses can secure loans of up to Rs 1 crore without any collateral. This scheme is open to new as well as existing micro and small enterprises. They can take loans from the institutions that have signed agreements with the Credit Guarantee Trust.
Bharatiya Mahila Bank, Stree Shakti, Mahila Udyam Nidhi Scheme, Mudra Yojana Scheme for Women are some more government schemes that can help women entrepreneurs in India grow their small businesses.
As a new business owner in India, you have several financing options that can help take your venture off the ground. Apart from the options discussed here, you could even get in touch with family or friends who might be interested in investing in your business.
If you choose a debt-financing option, it will function much like a loan. But if you go for an equity-based financing option, be prepared for the investors to be involved in the venture. Angel investors and venture capitalists will most likely monitor your activities and give their inputs. If you are someone who likes to work independently, look for a financing option that gives you the expected freedom.