Have an awesome idea for a business? Having business ideas is great but to launch your business, you need capital. Timely funding is what helps in converting a great business idea into a profitable start-up.
In the ongoing pandemic situation, getting funds for a start-up could be challenging. However, there are many alternatives for start-ups to fund their business ideas. A few of the best start-up funding methods have been listed below to help you to choose the right source of funding.
Also, Read Random thoughts on running a start-up
7 Best Ways to Raise Funds for Your Start-up
If you have saved enough funds, then self-financing or personal investment is the best way to finance your business start-up. Self-financing is helpful for a new entrepreneur who may find it difficult to procure loans from banks or NBFCs. This also saves a new entrepreneur, interest cost on loans, which can be better utilized for operating their business.
Financing through an Angel Investor
Angel investors are individuals with surplus cash. They are interested in investing in start-ups with the potential to grow. Entrepreneurs can get in touch with angel investors directly. This is a good option and your chances of getting finance through angel investors increase if you can convince them about the potential opportunities for your unique business idea.
However, the downside of this funding method is that angel investors expect a share in equity and higher returns on profit.
Crowdfunding is another concept which is gaining popularity over the years due to the surge in demand for start-up funds. Under this concept, multiple investors through the mode of social networking sites and web-based platforms collect funds from interested individuals to launch their business idea. Online Crowdfunding platforms also raise funds for various important social causes like charities, non-profit work, disaster relief, and such related events. This is a good concept for raising funds for a start-up.
However, it is not easy to convince interested individuals to invest in start-ups unless the business idea is unique and has tremendous growth potential.
Loans through Government Schemes
The Government of India has come up with various loan schemes for benefitting start-ups, SMEs, MSMEs, aiding socio-economic growth of rural India, women entrepreneurs, educated youth, etc.
These government loan schemes include the MUDRA loan scheme under Pradhan Mantri Mudra Yojana (PMMY), Start-up India, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) etc. These schemes are very good for new start-ups provided they fulfil the required eligibility criteria.
Also Read: Government Loan Schemes for a Start-up
Banks are considered traditional lenders who have loans for every purpose. Start-ups may find it more reliable and convenient to take a bank loan than other sources of finance as banks provide term loans and working capital loans.
However, it may not be very easy for a new business owner to get bank funds unless they can prove their credit history, income stability and provide good security. Also, the rate of interest may be high for a new business owner with no business vintage and the loan application process may be tedious as compared to other sources of lending.
Small business loans from NBFCs, MFIs
Getting loans for a new entrepreneur, who does not have a credit history, is difficult from private or public sector banks. However, small business loans are available from Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs) for start-ups even without having a credit history or credit scores. However, the interest rates on such loans are comparatively higher when compared to traditional banks.
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Peer-to-Peer Lending (P2P)
Under P2P lending, there are no intermediaries involved in the whole lending and borrowing process. Lenders directly lend money to borrowers as an investment for investing in their start-up. P2P lending is regulated by RBI so as to ensure benefit to both lender and borrower. However, the interest rate on P2P lending is higher as compared to traditional banks, NBFC’s or MFI’s. Also, lenders have to be convinced of the genuineness of the borrower’s venture and the uniqueness of business ideas for them to consider investing in such a start-up. Chances of rejection are thus high under P2P lending.
With so many modes of financing available to fund your start-up, entrepreneurs now have access to more funding choices than ever before. Go through the pros and cons of the funding methods listed above and choose the right one based on the financial requirements of your start-up. Get going with the funding process and launch the business of your dreams.