According to NASSCOM, an IT industry body, India witnessed the supplement of 1300 start-ups in 2019.
India, which is the third-largest start-up ecosystem globally, boasts of 24 Unicorns (companies with a valuation of $1 billion or more), with seven additions as of August 2019.
One of the primary reasons why India has become a hotbed for start-ups in recent years is because of the flurry of business finance options available.
In 2019, funding in start-ups clocked a phenomenal YoY growth rate of 70%, especially in the early stages. The total funding that year amounted to $1.6 billion.
Nevertheless, with the abundance of funding options available at the disposal of entrepreneurs, it is crucial to examine each and understand its nuances.
That way, entrepreneurs can make well-founded decisions concerning which finance option would suit what kind of business need.
Types of financing options available to young business entrepreneurs
Capital is the quintessential element of any business. It paves the way from ideation to the generation of revenues. And without the acquisition of adequate funding and appropriate financial assistance, a start-up can fail.
Here are some ways young entrepreneurs could raise capital for their start-ups –
One of the simplest and most convenient ways to infuse business finance is via self-finance. It is commonly referred to as bootstrapping. Self-financing is an ideal avenue for funds in the seed stage of a business.
It allows individuals to maintain autonomy over their business and avoid encumbrances on the capital structure initially.
If it is a joint-entrepreneurship venture, the partners could pool their savings or else loan from relatives and friends. However, this avenue is ideal as long as the seed capital requirement is slim.
Above a specific amount – varying from one individual to another – it is preferable not to bootstrap. In that case, individuals might consider a capital finance loan from an institutionalised source.
- Angel investing
This avenue of raising capital is one of the most popular among entrepreneurs. Angel investors are usually independent individuals or a group of individuals who invest their surplus cash in multiple start-ups. Typically, angel investors invest in a start-up in the seed stage.
A prominent benefit of such investors is they bring the experience into a start-up and can guide it toward a profitable direction. However, usually, they also require a percentage share in such company’s equity. Resultantly, it might impose a bit on the autonomy of such entrepreneurs. Nevertheless, it is a popular form of financing a business.
One of the most creative avenues to raise funds for small businesses is via crowdfunding. A most important advantage of crowdfunding is it acts as a litmus test for the potential of a business plan and provides an idea about the demand for a product. It can be a viable medium to raise funds at any stage in a business lifecycle.
However, sometimes an idea might have potential but cannot garner the general interest of the said crowd. Furthermore, it is an uncertain avenue of raising business finance and might take an indefinite amount of time to actualise.
- Loan from a financial institution
A capital finance loan from a financial institution is perhaps one of the most convenient and certain ways in which an entrepreneur can raise capital for his/her start-up. It does not involve the excesses of seeking investors and the uncertainty of crowdfunding.
Furthermore, a business loan is an all-weather financing option and can allow individuals the autonomy as well as the financial convenience of not burning through savings or profits entirely.
Moreover, financial companies like Bajaj Finserv bring pre-approved offers to ensure a simpler and faster approval and disbursal process.
It is also a popular financing route that young entrepreneurs take to infuse capital in their start-up. However, similar to other non-institutionalised funding options in the list, it is a tad uncertain.
Nevertheless, apart from these funding options to raise capital for a business, individuals can also consider venture capitalists and incubators and accelerators.
Raising business finance for a start-up is perhaps one of the trickiest and most challenging undertakings; however, the pursuit can provide abundant knowledge on how financing works in these cases.