Taking up entrepreneurship is a great idea, but how to go about it is what will decide the fate of the firm and your success as an entrepreneur. According to a recent study , in India 9 out of 10 start-ups fail every year and dearth of cash is probably the number one reason for a start-up death. Without cash, you are never going to make your dreams a reality. That is the reason why entrepreneurs at every stage of business, find themselves asking – How do I fund my start-up? When and what kind of funding you require depends upon the nature of business and what stage your business is in? Here are few ways to fund your start-up:
The cheapest and the most effective way of financing growth in one’s start-up is profits generated by the business. Every time a business takes external financing, they bear interest cost or lose ownership of the company to the extent of financing raised.
2. Friends and family
In most cases, first customers are acquired through existing networks. The same principal can be applied to finding financial support for your venture. If you have friends or family who can handle the financial risk, this can be a great way to get your business off the ground. Asking family and friends is one of the most common way to finance a start-up. Share a formal business plan with them, tell them openly about the pros-cons, and explain what the money will go toward and how it will grow the business.
Crowdfunding has been gaining popularity in Indian start-up ecosystem. Crowdfunding is taking donations, loan or pre-booking for your product or service from large number of people. In most cases, a founder puts up his detailed business plan on crowdfunding website and mentions goals of his business, amount required, and what the money will go toward and how the he/she aims to make the business profitable. If the crowdfunding campaign is towards pre-booking a product or service then the estimated time of delivery also has to be mentioned along with product description. Ketto, Indiegogo and Catapooolt are some of the popular crowdfunding platforms in India.
The government support offered to startups across India through various grants is enormous. A number of private foundations also have a variety of grant programmes. There are a number of grant awarding competitions as well. Grants are usually hard to win and many of the grants are purpose specific The process time, lengthy application process and huge competition makes it a tough nut to crack. In addition, it may be a distraction for the company from the day to day running of operations.
An example of a Government grant is the Biotechnology Ignition Grant (BIG) by Biotechnology Industry Research Assistance Council (BIRAC) to support the exciting ideas which have an unmet need for funding and mentor-ship. The call for proposal is announced twice every year, on 1st January and 1st July. As part of this scheme, successful BIG Innovators receive up to INR 50 lakh (approx. $100K) for research projects with commercialization potential with duration of up to 18 months.
5. Funding from Incubators & Accelerators
Incubators and accelerators are now existent in almost all major cities and few of them also offer virtual support. If you are early stage start-ups then you can look for a good incubator to get incubated to avail mentor-ship, office space and access to labs apart from seed support fund of 25 Lakhs INR. Incubation periods are usually for 18-36 months depending on the sector of operation. Accelerators are typically 4-6 months programs aimed at scaling up operations of start-ups by providing them required necessary resources and helps you establish good connections with mentors, investors, incubators and provides access to funding through demo day pitching.
6. Bank loans
While debt is not a suitable for a very early stage enterprise, it may be suitable in cases where the upfront capital investment is large and the lender can take security of the capital assets to make a loan. In cases where mortgage or capital assets are not there, it will be difficult and possibly impossible to raise debt from bank or non bank sources, in cases it is early in the business. For businesses with some track record and small scale, banks may be willing to fund under one of the various schemes but the amounts that they fund will not be too big. The Government gives a lot of importance to enable access to finance for MSMEs through banks and have set a priority sector target of 7.5% to achieve for lending to MSMEs. Hence every bank in India offers a financing to MSMEs. Recently, Government of India has started MUDRA loans to support early stage entrepreneurs. Mudra loan has 3 categories – Shishu, Kishor, Tarun with eligibility limit of INR 50,000 , 5 Lakhs, 10 lakhs. You are supposed to fill in the application form and submit along with your business plan. Once approved the loan gets sanctioned and you get a MUDRA card which works similar to a credit card. In addition, there are loan products available under the CGTMSE scheme with limits up-to INR 2 Crores. However, it is often heard that the process is slow and unpredictable.
A number of NBFCs also provide loans to enterprises typically under the Loan Against Property product. Some of them also provide unsecured loans up-to INR 15-20 lakhs but at a significantly higher rate of interest. For both banks and NBFCs, it is necessary that the business is profitable.
7. Specialized Venture Lenders
There are some specialized SME lenders who have the ability to lend without taking mortgage collateral and are also able to lend even if the company is not making profits yet. However, in those case, where the evaluation process requires significant due diligence, the funding requirement has to be larger and hence only companies with a reasonable tract record and turnover of at-least INR 4-5 cr are eligible for this kind of funding. Caspian Impact Investments (CII), debt fund of Caspian Impact Investment Advisers is a RBI registered NBFC and provides specialized debt finance to companies that strive to have positive social and/or environmental impact, in a responsible, transparent and sustainable manner. We invest in enterprises engaged in Food & Agriculture, Financial Inclusion, Healthcare, Clean Energy, Affordable Housing and SMEs across multiple other sectors. We were 1st lender to 105 companies which fall under the MSME category (Our total portfolio consists of 106 companies). If you think you are solving one of the social or environmental problems and are looking for debt then fill out the loan application form.