A billion dollar idea doesn't make a billion dollar company without funds, Staff and prospective customers. Startups have intellectual capital like the brilliant idea, patent etc., but to start with it, they need fund. Raising money and finding Sources of Funds may be the single most stressful part for many Founders.
Any business needs fund to start up;Depending on the nature of business, some of the business may needs less capital to start with, while other may need huge investment. Arranging such fund is the most challenging task for a startup.As a new entrepreneur you'll need to start thinking of all possible funding options before landing on one.
If an Experienced entrepreneur enters into new business they have few advantages as compared to new entrepreneur in sources of funding, they may pool capital from previous business or a steady stream of revenue they can use to fund a new business's cash flow.
Type of Fund required for a business: There are three types of cost involved in every type of business, i.e., capital cost, Fixed Cost, and variable cost.You should know beforehand how much fund will be required to start a business so as to determine the sourced of fund i.e., the amount you need to borrow as a loans, to rely on angel investors, or to try venture capital, being sure of your finances will also make it easier when pitching to investors.
- Capital costs: Entrepreneur needs Capital in form of assets to start with, which may differ from business to business. Common capital costs include, Purchase of buildings or land, Permits and licenses, Machinery, Vehicles, Shop fittings, furniture, branding, a website, domain name, and server space (for an Internet-based business).
- Fixed costs: Fixed costs need to be paid regardless of the amount of sales made or service provided.Fixed costs includes, Wages, salaries, electricity, rent, Internet, phone, and in some case,mortgage repayments.
- Variable costs: Variable costs vary based on business output. Common variable costs include, Raw ingredients, Production materials, Stock orders etc.
There are many sources of funding your business, for example, bank loans, family, friends, angel investors, venture capital, government funding etc.
The most interesting part of this article is that at last Part, apart from these common source of funding will discuss one more source of funding which can be availed i.e.in which you fund your own business endeavours. Let us discuss it one by one:
- Personal sources:
- Borrowing from friends and family: Arranging money from Friends and family who are supportive to the business idea can be quicker and cheaper. Interest and repayment terms, if any, may be more flexible than a bank loan.
- Credit cards:Credit cards are the most common source of finance amongst small businesses. Entrepreneur uses credit card to pays for various business related expenses.Using the model of payment term of credit card, business man gets access to a free credit period of around 30-45 days.
- Equity funding:
- Bank Loan
- Venture capitalists:
- Angel investors
- Crowdfunding:
- Government funding
- Funding through Self-fueled growth model:
If an entrepreneur is willing to share ownership of business, equity financing is one of the option of raising funds.Equity financing is a wide term which includes financing from friends and family by giving them some shares in the company, to giant initial public offerings (IPOs).Founders of Dropbox and Airbnb exchanged somewhere between a 7% and 10% stake to receive a small amount of funding.
Banks follow strict criteria in granting loan and to Startups; they never take risk no matter how exciting the idea is, until and unless any collateral security is provided to them in shape of land, building or any other asset of the owner or of the company. Bank also looks the existence of business in market, financial records,liquidity of an enterprise before granting any loan. Therefore for Startups, Banks will almost never provide funding.
Venture capital firms comprising of professional investors that understands the intricacies of financing and building newly formed companies or startups. A venture capital organisation take high risk by putting money in an enterprise, if the enterprise fails all money invested by them may be lost. They finance new startup which are often considered both high-growth and high-risk potential.It might take a long time to the institution investing money, before any profits and returns materialise.
Entrepreneurs often turn to venture capitalists since traditional forms of financing, such as banks loans, aren't readily available.Venture capitalists while investing in the business expect a high return to compensate for the high risk as well as shares in the company.
A venture capital organisation never retains its investment in a business indefinitely. While making investment in a business venture, it will also consider exiting out of the business eventually (after five to seven years, say) and realising its profits.
These Investors are normally friends or acquaintances of the entrepreneur. They buy equity in the firm and influence the decision of the owner. As in our real life finding an Angel a difficult task, same is the case in finding of Angel investors. Indian Angel Network in India is an example of Angel Investor which contributes equity in early-stage businesses.
Venture capital vs. angel investors
While angel investments come from individuals, Venture capital comes from a firm or a business. Venture capitalists invest millions of dollars in new startups while angel investors never put more than $1 million into a project.Venture capitalists will generally invest in startups which they feel has the potential to make them money, while angel investors generally make investments in firms that work in industries they are personally familiar with.
Crowdfunding is a form of alternative finance, which has emerged outside of the traditional financial system. Monetary contributions are raised from large number of people i.e., (i) from the project initiator who proposes the idea of business, (ii) the other individuals or groups who support the idea and (iii) a moderating organisation that brings the parties together to launch the idea.
Pradhan Mantri Mudra loan Yojana is one of the examples of government funding. Small Business Segment which comprise of proprietorship, partnership firms shopkeepers, fruits/vegetable vendors, truck operators, small industries, food processors, repair shops, machine operators, are provided assistance under Mudra. Its cover loan amount, starting from Rs. 50,000 upto 10,00,000.
The government also provides finance to companies in shape of cash grants as part of its policy for developing national economy. The government especially provide grant to high technology industries and to the business that set up their industry in rural areas where there are high level of unemployment.
Last but not the least, New Entrepreneurs should not sacrifice quality of work in trying to launch a multi-million dollar corporation overnight, Instead they should focus on initial core customers, work to find new customers and consistently strive to be remarkable to those customers you already serve. You quality of work will spread and more customers will come looking for you. Fund will start coming and you can use those funds in growth of your business. This is the best strategy to adopt for small business entrepreneurs. But still if you do feel you need funding, you must make sure you're not giving up too much of your business to get it.
Disclaimer: Statements and opinions expressed in articles are those of the author's personal views.
About the author: Satyendra Kumar Mishra
Satyendra Kumar Mishra is the founder and CEO of EmpressLegal.com which was founded with the singular objective of offerings the highest quality corporate and incorporation services to its clients all over the globe. Since its foundation, EmpressaLegal.com has helped entrepreneurs across India to incorporate their businesses in a fast and secure manner.