According to a study on successful businesses, over 94% of new businesses fail during first year of operation. Lack of funding turns to be one of the common reasons. Money is the bloodline of any business. The long pains taking yet exciting journey from the idea to revenue generating business requires a fuel named funds. At almost every stage of the business owners find themselves asking – How do I finance my start-up?
Now, when would you require funding depends largely on the nature and type of the business. But once you have realized the need for funds, below are some of the different sources of finance available.
Here is a comprehensive guide on funding options for start-ups that will help you raise capital for your business.
Self-funding, also known as bootstrapping, is an effective way of start-up financing, especially when you are just starting your business. First-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success. You can invest from your own savings or can get your family and friends to contribute. This will be easy to raise due to less formalities/compliances, plus less costs of raising.
When business get some standing from the initial stage then many lenders get fair idea of the execution capabilities of the promoters & business prospectus based on the executed numbers. By showing properly a start up can tap debt funding in shortest possible time with efficient way. The effective utilisation of debt funding results into better return for equity & establish the capability to deliver consistently because debt involves repayments disciplines.
Next round of investors or fund providers take the effective utilisation of debt funding treat as one of the positive trait for management & attach higher weightage on execution capacity.
Debt funding also gives comfort for expansion without dilution of stake of owners. With disciplined repayments, a business owner can tap liquid funds regularly through debt.
It can be termed as growth capital with limited rewards to lenders whereas owners can enjoy exponential rewards with investment of less capital.
Once the business become fully mature, next round of funding can be tapped with higher valuation for business stake which result into true value unlocking for promoters & they get fully incentivised for their risk capital of initial stage of business.
Venture capitals are professionally controlled funds who put money into organizations which have big capability. They generally put money into a business towards equity and go out while there may be an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organization is going, evaluating the business from the sustainability and scalability factor of view.
SME IPO is one of the wonderful mechanisms to raise funds by enlarging the business stakeholders whereby promoters are able to reduce their risk by making investors as participant of their growth story with or without losing management control of the business.
Through this route funds can be raised for Business Expansion, Working Capital or Acquisitions to expand product / service range without putting hard efforts desired for green field projects.