If you are looking for ways to raise capital for your startup business, then you are at the right place. Follow along to find out essential financing techniques to launch your startup.
While you are at the early stages of developing your startup, the management team might not have proper formation, and the products and services might still need to undergo more testing, and they can still be in a developmental phase. At this stage, your patents might still not be granted, and you might need to redesign your website. In this developmental stage, the entrepreneurs might need capital investments from venture capitalists and angel investors to grow the business, irrespective of whether the startup is an MSME or large enterprise. Startup funding can deal with website designing, incorporation and everything else per your requirements. Fundraising is a significant deal-breaker for an entrepreneur to move up the success ladder. You can fundraise online or offline; however, the success depends on your fundraising ideas. Here is a compilation of a few financing techniques for Online Business Funding Options.
Techniques for Online Business Funding Options:
Self Funded Startup Business
Personal financing is the most secure way used by several start-ups. Even if you apply to avail of funds from a government entity or venture capitalist, you will be asked about the amount of capital you will be investing in your business. First-time entrepreneurs should invest their savings to show the investors that they are seriously interested in this venture. In the developmental stage, you are more likely to get the business loans, since investors will not have a reason to deny your request. They will also consider your business stable enough to be a low-risk investment.
Encountering Angel Investors
Individual investors with surplus cash to invest in business ventures are known to be Angel Investors. They are interested in fundraising for startups in India and abroad. However, unlike loans offered by financial institutions, angel investors demand higher returns for their profit, which can be risky for new start-ups. India’s renowned angel investors are Indian Angel Network, Mumbai Angels and Hyderabad Angels. Startup business owners directly contact them to find support.
Click Here: Apply for Online Fundraising Services
Option for Crowdfunding
Crowdfunding stands for collecting funds from investors through social networking platforms and crowdfunding websites for business needs. Online crowdfunding portals help in raising funds for charities, disaster management, events etc. Some online crowdfunding platforms in India are Ketto, Milaap, Kickstarter, Catapooolt, Fundable, FuelADream, Indiegogo, Wishberry etc.
Apply for Loans Under Government Schemes
There are various Indian Government loan schemes are available in India to help startup enterprises, MSMEs, and SMEs while promoting social and economic growth in rural India. The schemes also focus on balancing the lives and aims of women entrepreneurs, individuals from the SC/ST category, educated youths and upgrading SSIs or small-scale industries, villages, residents of urban and rural areas etc. Various loan schemes promoted by the Government of India to facilitate startup businesses are the MUDRA loan scheme initiated under PMMY or Pradhan Mantri Mudra Yojana, CGTMSE or Credit Guarantee Fund Trust for Micro and Small Enterprises, Startup India, Atal Innovation Mission, Stand-up India, Make in India, TREAD or Trade Related Entrepreneurship Assistance and Development etc. You can visit each website separately to find out which scheme suits you.
Apply for Loans from Public Sector and Private Banks
Banks are the priority of startup enterprises since they are the most reliable and convenient way of getting funded. As a startup enterprise, you can get loans from banks in two forms- working capital loans and term loans. Every private and public sector bank in India offers business loans for new ventures. The loan amount, interest rate and repayment tenure vary. You can talk with the officials of different banks to find the loan scheme for you.
NBFC or MFI-approved Small Loans
If you do not have any prior experience in lending money or do not have a financial history or have not yet maintained any credit score, then you might find it difficult to have the loan approved for your start-up. You can therefore try contacting NBFCs, Non-Banking Financial Companies, MFIs or Micro Finance Institutions where your business loan might get approved based on your need without checking your financial history or credit score. However, you might have to bear higher interest rates than other PSU banks.
Avail Business Credit Cards
In recent times with the emergence of business start-ups, credit cards are widely used for business purposes. Suppose your business needs a small amount of money to primarily initiate the venture. In that case, you can use credit cards to carry on transactions and make timely repayments so that you do not have to face challenging debts and high-interest rates deducted as a form of a penalty.
Peer-to-peer Lending
In this type of money lending, no intermediate parties are involved. Lenders lend money to start-up owners or borrowers as a form of investment, and borrowers receive the money to invest in the business. The interest rate is higher, and RBI governs these peer lending institutions to maintain clarity in the borrowing process.
Why is it difficult for small businesses to get loans from banks?
Small businesses often face challenges when trying to secure loans from traditional banks. Several factors contribute to this difficulty:
Limited credit history: Small businesses, especially startups, may have a limited credit history or no credit history at all. Banks typically rely on credit scores and financial history to assess creditworthiness. Without a strong credit history, small businesses may be seen as high-risk borrowers.
Lack of collateral: Banks often require collateral, such as property or equipment, to secure loans. Small businesses, particularly those in their early stages, may not have sufficient assets to offer as collateral. This lack of collateral can make it harder for them to qualify for bank loans.
Stringent lending criteria: Banks have strict lending criteria, including minimum revenue requirements, profitability, and years in operation. Small businesses that do not meet these criteria may be deemed ineligible for bank loans.
Lengthy application process: Banks typically have lengthy and complex loan application processes. Small business owners may find it time-consuming and challenging to gather the required documentation and navigate the application process, especially if they lack experience or resources.
Risk aversion: Banks tend to be risk-averse and prefer lending to established businesses with a proven track record. Small businesses, particularly those in innovative or high-growth industries, may be viewed as riskier investments, making it harder for them to secure bank loans.
What is alternative financing?
Alternative financing refers to non-traditional methods of obtaining funding for businesses. These options have emerged as alternatives to traditional bank loans and provide small businesses with access to capital outside of the traditional banking system. Alternative financing options include:
Peer-to-peer lending: Platforms connect borrowers directly with individual lenders, bypassing traditional financial institutions. Peer-to-peer lending allows small businesses to access funds from a pool of individual investors.
Crowdfunding: Small businesses can raise funds by soliciting contributions from a large number of individuals through online platforms. Crowdfunding campaigns often offer rewards or equity in exchange for financial support.
Invoice financing: This option allows businesses to sell their outstanding invoices to a third-party company at a discount. The company advances a percentage of the invoice value upfront, providing immediate cash flow.
Merchant cash advances: Businesses receive a lump sum payment in exchange for a percentage of future sales. Repayment is made through a fixed percentage deducted from daily credit card or debit card sales.
Microloans: These are small loans provided by nonprofit organizations or community development financial institutions to support small businesses. Microloans often have more flexible requirements and lower loan amounts compared to traditional bank loans.
Why might small businesses seek alternative financing?
Small businesses may seek alternative financing for several reasons:
Difficulty obtaining bank loans: As mentioned earlier, small businesses often face challenges when trying to secure loans from traditional banks. Alternative financing provides them with alternative options to access capital.
Quick access to funds: Alternative financing options often have faster approval processes compared to traditional bank loans. Small businesses may need immediate funds to seize opportunities, cover unexpected expenses, or fund growth initiatives.
Flexible requirements: Alternative financing options may have more flexible requirements compared to banks. This can be beneficial for small businesses with limited credit history, lower revenue, or unconventional business models.
Niche industries or innovative ventures: Banks may be hesitant to finance businesses operating in niche industries or those pursuing innovative ventures. Alternative financing options may be more open to supporting these types of businesses.
Diversification of funding sources: Small businesses may choose alternative financing to diversify their sources of funding. Relying solely on bank loans can be risky, and having multiple financing options can provide greater stability.
The benefits of alternative lending
Alternative lending offers several benefits for small businesses:
Accessibility: Alternative lending options provide small businesses with access to capital that may be otherwise unavailable through traditional banks. This can help them fund growth, cover expenses, or seize opportunities.
Speed: Alternative lenders often have streamlined application processes and quicker approval times compared to traditional banks. Small businesses can receive funds in a shorter timeframe, allowing them to address immediate needs.
Flexibility: Alternative lenders may have more flexible requirements and be willing to work with small businesses that do not meet traditional lending criteria. This flexibility can be advantageous for startups or businesses with limited credit history.
Diverse funding options: Alternative lending allows small businesses to diversify their sources of funding. By accessing different types of financing, businesses can reduce their reliance on a single funding source and spread their risk.
Innovation: Alternative lending options often leverage technology and innovative approaches to provide financing solutions. This can result in more tailored and efficient services for small businesses.
How can small businesses prepare to apply for alternative lending options?
To increase their chances of successfully obtaining alternative financing, small businesses can take the following steps:
Understand their financial needs: Small businesses should have a clear understanding of their funding requirements. This includes determining the amount needed, the purpose of the funds, and the expected repayment terms.
Review their financials: Small businesses should ensure their financial records are accurate and up to date. This includes organizing financial statements, tax returns, and bank statements. Lenders may require this information during the application process.
Build a strong business plan: A well-crafted business plan can demonstrate the viability and potential of the business to lenders. It should outline the company’s goals, strategies, financial projections, and repayment plans.
Research alternative lenders: Small businesses should research and compare different alternative lenders to find the ones that best suit their needs. Factors to consider include interest rates, fees, repayment terms, and customer reviews.
Prepare necessary documentation: Each alternative lender may have specific documentation requirements. Small businesses should gather the necessary documents, such as identification, business licenses, financial statements, and proof of revenue.
Improve creditworthiness: While alternative lenders may have more flexible requirements, having a good credit history can still be beneficial. Small businesses should work on improving their credit scores by paying bills on time, reducing debt, and resolving any outstanding issues.
Seek professional advice: Small businesses can benefit from seeking advice from financial advisors or consultants from Vakilsearch who specialize in alternative financing. These professionals can provide guidance on the best options and help navigate the application process.
Online Business Funding Options: How to find business financing options?
Small businesses can explore various avenues to find business financing options:
Online research: Conducting online research can help small businesses discover a wide range of financing options. They can explore alternative lenders, crowdfunding platforms, government-backed loan programs, and industry-specific funding sources.
Networking: Engaging with other business owners, industry associations, and local business communities can provide valuable insights and connections to potential financing sources. Networking events, conferences, and trade shows can be excellent opportunities to meet lenders and investors.
Financial institutions: While traditional banks may be challenging for small businesses to secure loans from, it’s still worth exploring local banks and credit unions. Some community banks may have more flexible lending criteria and be more supportive of small businesses.
Conclusion
Apart from these options, you can also seek help to come up with interesting online business funding options by Vakilsearch. Vakilsearch has partnered with prominent venture capitalists and angel investors in India to provide the best-in-class fundraising services for ambitious entrepreneurs to scale up their startups. Once you provide the idea you are working on, Vakilsearch will put together your pitch deck. Then the design specialists will take care of your brand’s image and concept to come up with a completed pitch deck within 14 business days. Create a compelling pitch deck with Vakilsearch now with the guidance from legal experts, eye-catching presentation features and with the help of a dedicated compliance team and get connected with potential investors.
FAQs
How can I raise funds for my business?
There are several ways to raise funds for a business, including: Bootstrapping: Using personal savings or revenue generated by the business to fund operations Friends and family: Borrowing from friends and family members who are willing to invest in the business Crowdfunding: Soliciting contributions from a large number of individuals through online platforms Alternative lending: Accessing capital through non-traditional lending options, such as peer-to-peer lending or invoice financing Venture capital: Raising funds from investors in exchange for equity in the business. Angel investors: Receiving funding from individual investors who provide capital in exchange for equity or convertible debt Grants: Applying for grants from government agencies, foundations, or other organizations that provide funding for specific purposes
What is the best source of funding for small businesses?
Crowdfunding can be a good option for businesses with a strong social media presence or a compelling story to tell. Venture capital or angel investors may be suitable for businesses with high-growth potential. Small businesses should research and compare different funding options to find the ones that best suit their needs.
How do startups get funding?
Startups can get funding through various sources, including: Using personal savings or revenue generated by the business to fund operations Borrowing from friends and family members who are willing to invest in the business Soliciting contributions from a large number of individuals through online platforms Accessing capital through non-traditional lending options, such as peer-to-peer lending or invoice financing Raising funds from investors in exchange for equity in the business. Receiving funding from individual investors who provide capital in exchange for equity or convertible debt Participating in programs that provide funding, mentorship, and resources to startups
Which is the most available funding source for new businesses?
The most available funding source for new businesses depends on their specific needs and circumstances. Traditional bank loans may be available for businesses with strong credit histories and established revenue streams. However, alternative lending options may be more accessible for new businesses with limited credit history or unconventional business models.
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