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According to a recent study, more than 94% of new companies fail in the first year of operation. Lack of funds is one of the most common reasons. Money is the line of all companies. The long, careful, and fascinating journey from idea to income-generating business requires a fuel called capital. For this reason, entrepreneurs in almost all phases of the activity ask themselves: How can I finance my start-up?
When you need financing depends mostly on the type and type of business. However, once you understand the need to raise funds, here are some of the different sources of financing available.
Here is a complete guide with five financing options for start-ups to help you raise capital for your business. Some of these financing options are targeted at Indian companies. However, similar alternatives are available in different countries.
Self-financing, also known as bootstrapping, is an effective method of start-up financing, especially if you are starting your business. New entrepreneurs often find it challenging to obtain the funding without first showing some traction and a plan for potential success. You can invest in your savings or have your family and friends contribute. It will be easy to increase as there are fewer formalities/conformities and fewer collection costs. In most situations, family and friends are flexible with the interest rate.
Self-financing or bootstrapping should be considered as the first financing option due to its advantages. If you have your own money, you are tied to the business. At a later stage, investors see this as a good point. However, this is only suitable if the initial need is low. Some companies need money from day one, and for those companies, priming may not be a good option.
Crowdfunding is one of the most recent ways to finance a start-up that has become very popular recently. It is like taking out a loan, pre-order, contribution, or investment from several people at the same time.
How crowdfunding works: an entrepreneur presents a detailed description of his business on a crowdfunding platform. It lists your business goals, profit plans, amount of funds needed, and why, etc. And then, consumers can read about the business and donate money if they like the idea—anyone who gives money promises online to buy the product in advance or to donate. Anyone can help a company they genuinely believe in.
The best thing about crowdfunding is that it can also generate interest and thus help market the product with funding. It is also a blessing if you do not ask if there is a demand for the product you are working on. This process can eliminate professional investors and brokers by placing money in the hands of ordinary people. Venture capital investments could continue to attract business with a, particularly successful campaign in the future.
Also, keep in mind that crowdfunding is a competitive place to collect donations. So if your business is not trustworthy and can attract the attention of the average consumer through description and photos online, it may not be the case for you to find crowdfunding.
Angel investors are people with excess cash and eager to invest in future start-ups. They also work in network groups to select proposals together before investing. In addition to capital, you can also offer mentoring or advice.
Angel investors have helped create many prominent companies, including Google, Yahoo, and Alibaba. This alternative form of investment generally occurs in the early stages of business growth, and investors expect equity of up to 30%. They prefer to take more investment risks to obtain higher profits.
Angel’s investment as a financing option also has shortcomings. Angel Investors Invest Less Than Venture Capitalists
Here you make the big bets. Venture capital is a professionally managed fund that invests in companies with high potential. Typically, they invest in companies to maintain equity and exit a public offering or acquisition. The VCs offer expertise, advice, and serve as a litmus test for the organization’s management and evaluate the business from the point of view of sustainability and scalability.
A venture capital investment may be suitable for small businesses that are out of the initial phase and are already generating income—fast-growing companies like Flipkart, Uber, etc. With an existing exit strategy, you can earn up to $ 10 million to invest, connect, and grow your business quickly.
However, there are some downsides to venture capitalists as a financing option. Venture capitalists have a short leash when it comes to keeping the business going, and they often try to recoup their investment in three to five years. If you have a product that takes a long time to launch, venture capitalists may not be very interested in you.
They generally look for more significant opportunities that are a little more stable, companies with a strong team, and excellent traction. It would be best if you also were flexible with your business and sometimes give up a little more control. Therefore, if you are not interested in too much advice or commitment, this may not be the best option.
Start-up companies may consider incubator and accelerator programs as a financing option. These programs are present in almost every major city and help hundreds of new businesses each year.
Although used interchangeably, there are few fundamental differences between the two terms. Incubators are like the parents of a child who provides the company with accommodation, training, and a network for a company. Therefore, accelerators are more or less the same, but an incubator helps/feeds a company while walking, while the accelerator helps to make a giant leap.
These programs typically last 4-8 To to months and require a time commitment from the business owner. You can also use this platform to build good relationships with mentors, investors, and other start-ups.
