Are you planning to launch your own business but don’t know where to start with raising funds? This guide takes you through the key ways Indian startups and small businesses access capital today, from self-financing to angel investors, government assistance, and more.
Although there are several options for startups seeking funding, it is essential to approach this subject with an understanding and strategy to attract investors who can see the big picture and commit to the long term.
This article will help you do so. Learn how to evaluate routes best aligned to your startup’s stage and needs with this guide.
Business funding for small businesses: How does it work?
Investors provide capital to new companies in return for a stake in the business or a portion of ownership. This means they are entitled to share in the startup’s profits.
Investors receive back the amount they invested in the startup plus a portion of any profits made by the business. But there will always be a possibility that the business might lose money if it doesn’t do well.
Funding a startup goes through many phases. The first round of funding for most startups and businesses is known as a seed round. Startups then go on to Series A, B, and C funding rounds. However, before seeking startup finance, a startup must do a business valuation.
When determining their value, startups need to think about their management, past performance, market share, risk, and profitability. Once the value is set, startups may proceed with a fundraising round.
On the other hand, if you are wondering “how to get foreign funding for business” then partnering with foreign companies can also give you their money and technology to use. However, make sure to comply with the FDI regulations and other legal requirements, including tax, accounting, and reporting.
Also read: How to do tax planning for high-income earners?
Types of funding for startups
Equity funding
Equity fundraising is raising funds from investors by selling a part of a business’ ownership to them. Equity investors often participate in the decision-making procedure, and startups typically give away a portion of their stake in the company to them.
Debt funding
Using debt funds means getting loans and repaying them with interest. The principal amount plus interest needs to be paid back within the agreed-upon time frame. Debt funds are not as involved in making decisions.
Grants
To help startups achieve their goals or promote successful outcomes, certain entities provide financial support called grants. Grants are provided in several instalments as per the achievement of particular milestones. So, to get the grants, the startup has to keep working towards the milestones.
How to raise funds for a startup business in India?
- Self-finance your business idea
If you are wondering “how to get funding for a small business” then let us tell you that many new businesses rely on self-financing or individual investments as their primary source of capital.
This issue remains: how much capital are you planning to put into your startup? This issue is applicable regardless of whether you are seeking investment from a bank, a venture capitalist, or perhaps the government.
The ideal course of action for first-time business owners is to invest their funds. Lenders will have no reason to reject your request for a business loan after your company has matured and established itself; this is because they will see your company as a stable and low-risk investment.
- Angel investors
A lot of small businesses in India rely on the financial support of angel investors, who are also called business angels, to stay afloat and expand. As a result, they may have more significant objectives than achieving financial gain.
There is a mission-driven focus among many angel investors, but some still want to make sure their investments are safe and make money. You may attract angel investors and get a substantial amount of funding for your startup if you have a solid idea, an effective strategy, and an excellent pitch.
However, it’s essential to keep in mind that angel investors may focus on funding businesses in their early stages and for smaller amounts than venture capital companies.
Also read: What exactly do angel investors do?
- Venture capital
Venture capital is a great place to start when looking for ways to raise money for a new company in India. The term “venture capital” refers to the money and loans given out by people or organisations whose main activity is to invest in privately owned startups.
In return for a share of ownership, these entities and individuals invest in startups and early-stage companies.
It should be noted that venture capital companies often prefer not to participate in the early funding rounds of businesses unless the management team behind them has an established track record of success.
Typically, they are more interested in funding established, profitable companies rather than new projects that have taken a significant financial commitment from their founders.
Venture capital firms are an excellent resource for businesses because of the wealth of expertise and insight they bring to the table, which they provide via funding, advice, and contacts within the sector.
- Funding through government loan programmes
The government of India has established several loan schemes with the following goals: to assist new businesses, small and medium-sized enterprises (SMEs), micro, small, and medium-sized enterprises (MSMEs), women business owners, young people with college degrees, rural and urban residents alike, and so on.
The Indian government has launched several loan programmes aimed at assisting new businesses, such as the MUDRA loan scheme, Start-up India, Stand-up India, Make in India, and many more.
- Banks and commercial lenders
Startups in India often seek funding from commercial lenders and banking institutions such as credit unions and bank branches. A thorough and well-thought-out business strategy, collateral, and an excellent credit history are the three main requirements of most banks and lenders. For new businesses, this may be a real challenge to overcome.
But after the company is up and running and the banks see your P&L, balance sheet, and cash flow projections, they may be more willing to lend you additional funds.
Also read: Managing Business Finances Effectively
Conclusion
Indian business owners can get the money they need to start their dreams today in many ways. Although each option seems appealing, it needs to be carefully considered. It’s essential to know how each funding option works so you can make choices that support your business goals.
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