Funding Options To Finance Startups - Business Loan Blog - Tata Capital

5 Funding Options to Raise Capital For Start Ups

Mar 07, 2017

The main challenge of establishing a new business is capital requirement. Funds are required to finance asset purchase, licenses and permits, daily operation of a firm, like expenses towards wages, salary, rent, inventory, and other administrative costs. Businesses need funds to finance their long-term and short-term expenditure.

Many startups fail during the first year of their operation. One of the main reasons for failure is lack of funding. Entrepreneurs need to know the various sources of finance and select the most-feasible source catering to their needs.

Following are five funding options entrepreneurs may use to finance their startups.

  • 1. Business loans

One of the most feasible financing options for startups is availing of business loans. The borrower obtains a loan from the lending institution, with an agreement to repay the amount with interest over a period of time. Many banks and lending institutions now offer flexible repayment schemes which enable you to prepay or post-pay the loan according to the cash flow of your business.

  • 2. Bootstrapping

Some lenders provide business loans only to those businesses which are profitable and have a trading history. In such cases, entrepreneurs invest from their own savings. They may also borrow from family and friends. Peer-to-peer lending has some unique benefits, like low or no-interest payments. Besides, entrepreneurs do not have to go through the tedious loan application process. However, this finance vehicle is suitable only if the required amount is small.

  • 3. Crowd-funding

The concept of crowd-funding has gained popularity in recent times. Applicants may upload the details of their startup venture on a crowd funding platform. Based on the details, like business goals, amount required, plans for making profit, interested individuals may provide money to budding entrepreneurs.

  • 4. Angel investors

Angel investors are wealthy individuals who are ready to invest in startups to gain interests. Angel investors not only offer capital but also provide management and business expertise. This form of finance is a very popular as entrepreneurs are allowed to have total control over their business and are able to acquire mentorship as and when needed.

  • 5. Venture capital

Venture capital is similar to angel investors, except that capital is sought in the form of equity. Venture capitalists do not contribute from their own pockets; they rather obtain funds from other people's money through pensions, private equity, besides many others. Venture capitalists usually exit when there is an acquisition or an Initial Public Offering (IPO).

With plethora of options available in the market, it has become difficult to opt for the right choice of finance. Therefore, weigh the pros and cons of every finance vehicle and make a well-informed decision.