It goes without saying that for a company to run successfully, funds are more than vital. While most budding entrepreneurs are young and therefore, typically lacking personal savings, there is always the need to find the right type of funding to help your dream company soar. The Indian government has been actively encouraging the youth of our country to start their own businesses rather than chase after MNCs. To aid that, many attractive plans and schemes are being designed. More than ever now would be the right time to start a company of your own. If you have an idea and the other basic framework ready, the next thing on your list would be funds. This article will guide on the various types of funding that are currently available to startups and what the nature of each type is. Sit back, read on!
In layman terms, funding is the act of providing money or other financial resources, either as an investment or as a loan or even as a courtesy to an institution to help with its functioning. Funds available to young startups today can be briefly classified into many classes. For further clarity, let’s examine the various types of funding models in use today.
Typically applied in companies which involve a single person being the head or smaller businesses in general. Like the sole proprietorship or a one person company (OPC). While this does not count as funding in the conventional sense because not money is being “raised”, this is a method to generate capital. In this method, the person or people working in the company put in money for their company from their personal savings and assets. No approaches are made to external sources seeking money or investments of any kind.
The focus remains on using personal assets and finances to get the company up and running to yield profits. One of the best things about bootstrap funding is that it prevents other parties from developing an interest, read share, in your company and its profits. This type of funding is sometimes called as self-financing.
As evident from the name, crowdfunding is a method in which small amounts of cash is collected from a massive crowd of people. This crowd of people could be from your personal friends’ circle or acquaintances or even absolute strangers (this would be rare because why would any stranger give you free cash?). However, there’s a possibility that it could get harrowing. When you are burdened with the pressure of running a company, added pressure of having to go through your personal network asking for money might not be ideal for everyone.
Crowdfunding can be further classified into three based on the nature of funds. They are –
- Reward based funding: Again,as evident from the name, people who contribute to your company expect offers or other services in exchange for providing financial resources. In India, many crowdfunding platforms can be accessed through the Internet. Entrepreneurs can raise some funding using such platforms after offering suitable incentives.
- Donation based funding: Investors get zero returns, neither cash nor shares. This model is rarely applied to commercial companies as the prospect of zero returns discourages many investors. However, NGOs working for a plausible cause or movements to help the underprivileged or calamity affected people readily gets donation based funding.
- Equity-based funding: This is easier to apply as the prospect of owning shares attracts many investors. Every share makes the investor a part owner and they will most likely receive returns in the form of cash.
3. Angel Funding
Business angels or informal investors are typically individuals or institutions that have done very well for themselves or are affluent enough to provide funds to companies without expecting much in return. Investments are made in personal capacities and shares or ownership expectations are almost null. Often, the first round of funding you raise, the seed round, is from angel funders.
For first-time entrepreneurs, angel funders are more favorable than any other kind because they not only bring in cash, they often bring in some valuable experience and guidance. Simply put, angels are folks, typically successful businessmen themselves, who are looking for opportunities to raise successful entrepreneurs without expecting much in return.
4. Debt Funding
As the name suggest, this is a method of raising funds by borrowing cash. The source from which you borrow could vary and this gives rise to the various types of debt funding. They are –
- Small bank loans: Loans designed specifically for rising business, having lower interest rates and is designed to be easily available. Irrespective of whether your business does well or not, you will have to pay back the cash that was borrowed from the bank.
- Asset loans: Loan provided against a collateral. It could be the entrepreneur’s personal asset or assets of someone in your social network. However, such loans are rarely used for funding companies as the chances of losing the asset if the business goes south are high.
5. Venture Capitalist
This the probably the most popular and familiar type of funding. A venture capitalist (VC) is typically a private investor willing to provide financial assistance to a startup that shows promise. This is a form of equity financing with the investor standing a high chance of making massive profits if the company does well. VC funding actually is a kind of debt financing with equity being the collateral against which money is given to the entrepreneur.
Often young companies, ie companies that are just starting out but looks promising that become eligible for VC funding. It is a kind of long-term funding but since it gives away equity to the investor, it is a bad choice for entrepreneurs who wish to retain absolute control of the company with themselves. That said VC funders are choosy and rarely invest in companies that do not look that great.
Each type of funding model described above must be independently researched before zeroing in on one. If you are a first time entrepreneur, we recommend that you contact us or other professional services before taking the necessary steps to begin your startup. Also, it is a widely accepted fact that investors prefer incorporated entities to give out funding.
Handle Funds With Care
Even if you decide what kind of funding you want, there’s still the question of you qualifying for it. When you expect someone to give your their hard earned cash to build your empire, you will become indebted to them in more than one ways. If you are someone with a killer startup idea, LegalDesk.com will help you start a company by assisting with the various legal documentation needs. We have startup specific incorporation and documentation packages which will help you sail through the process smoothly.
Beginning a business of your own is certainly a monumental step which requires considerable thought and effort. If you have the passion for it, this is certainly a good time to pursue that startup dream. Cheers!