For a new start-up business, money is required to get a space on rent, to pay employees, for R&D, to purchase furniture and fixtures and for other business expenses.
You have several options to fund your business. You may try to fund the business either from your personal savings or by a bank loan or by using the funds generated from business.
If you do not have enough business assets or personal assets then bank loan will not be possible. Personal savings will help you only when you have huge cash or bank balance for business. The third and last option of using money generated from business will work for service industries.
For start-up, we have another way to get money, it’s called Venture Capital funding. It’s the most used method of funding for start-up companies. We will be discussing Venture Capital Funding option at the end of the article.
What ever way you select, funding will be broadly classified under two heads, debt capital or equity capital.
In debt capital funding, you will get a loan, generally bank loans, which you need to pay over a specific period of time with interest.
In equity capital funding, Start-up Companies will get money or capital in return of equity shares. Equity shares will allow the investor to participate in profit and loss of the start-up business.
If you think that your start-up business will generate enough cash to pay back interest amount on bank loan or debt capital then the first option of debt capital funding will best suit your requirements.
If you are ready to give away certain amounts of profit in exchange of ownership of the start-up business then go ahead with the second option of equity funding. This will also save you when your start-up is incurring loss at early stage.
Generally banks do not fund start-up companies due to high risk involved in its future existence. If you manage to get a loan from a bank then that may be very less compare to your requirements. If your business requires lots of cash to fund its growth potential then the only option you have is equity capital funding.
In India and abroad, we have venture capital firms to fund start-up business in exchange of ownership. Based on business requirements, these venture capital firms invest in start-up companies for a high return.
Venture Capital Firms – Best way to raise money for start-up business
Venture capital firms pool money from a bunch of investors in order to get millions or billions of dollars to invest in start-up companies. These VC firms are also called private equity.
If your business requires huge start-up expenses or you want your business to grow very quickly then Venture Capital firms can help you to get started.
First round of money received from VC firms are called seed fund. Over a period start-up companies will receive 3-4 rounds of funding before getting acquired or IPO.
One can also try to get angel investor’s funding into the start-up business. Angel investors are wealthy individuals who operate like VC firms.
Angel Investors – Alternatives to venture Capital Firms
Angle investors age generally wealth entrepreneurs who finance new businesses with high growth potentials. In return of money, angel investors buys shares in the ownership of the new business or Start-up Company.
This means, your start-up business will partially be controlled by the angel investor based on the equity shares issued. Generally they also take part in the board of the company by which their experience and contacts also help in doing business.
If you are ready for sharing ownership and profit or loss with an outsider then you can avail this option.
One can also opt for Crowdfunding. It will allow you to fund small amount of money from a lot of people.