Funding Alternatives for Start-ups and SMEs to Raise Capital
It has been estimated that over 94% of businesses fail in the very first year of operation. Among the many reasons, lack of adequate funding happens to be the most common. As many entrepreneurs have found out to their dismay, mere brilliant ideas are unlikely to be successful in the marketplace unless there is enough money to fuel the dream. Funding, therefore, remains the favorite bugbear of entrepreneurs all over the world. The amount and timing of the fund requirement largely depend on the nature and size of the business. A quick look at the various funding options for your business:
One of the most popular and effective ways of financing start-ups, especially in the very early stages, is to use your own savings and contributions from family and friends. This works out the best at this stage of the business because institutional finance will require adherence to many formalities and you will need to provide documented business plans and financial projections that may not be available. The cost of the funds is usually negligible and repayment schedule flexible. When you approach investors at a later stage, they will also appreciate your commitment to the business because you have personally invested in your idea. However, this self-financing route works well only when the fund requirement is modest.
Recently, raising money through crowdfunding has become popular because of some notable successes by start-ups. The way it worksis that the entrepreneur approaches a crowdfunding platform, and puts up his business idea, financial projections, and the fund requirement. Interested customers can promise to buy the product when available so that the entrepreneur has a promising order book even before commencing operations. They can also donate money to the project. Because of competitive pressures, only projects that are very innovative and have more than a reasonable chance of success get participation to the extent that is required. However, if you are successful, you would have not only raised funds cheaply but also given your business lots of publicity. Successful campaigns may also lead to venture capitalists displaying interest to take the idea forward to the next stage.
If your business has promise and there is not only entrepreneur enthusiasm but also rock-solid business plans, you could catch the attention of angel investors. These are cash-rich individuals who invest in the equity of the start-up, help it to grow and exit at a later stage when they can make a reasonable profit for the risk they had assumed. However, angel funding could be a limiting factor, if your business is expanding fast and requires more capital. Angel funding is a not a typical loan for SME, rather you will need to part with a share of the company that will be sold when the angel funder exits.
If you find angel funding inadequate to meet the capital requirements, it could be the time to seek venture capital that is typically available from professionally-managed private funds that specialize in investing in businesses with highprofit potential. They will take up equity in your company, and help you to grow aggressively by mentoring you and offering specific industry and management expertise. They will take your company up to a stage it can make an IPO or be acquired by another company and exit with a handsome return. Venture capital is only available to companies that have crossed the start-up stage and are on the way to bigger things with a strong management and robust business plan at hand.
Banks, NBFCs, and Microfinance Providers
Once you have chalked up a few years of successful operation and have managed to get your profit and loss account and balance sheet in order, you can think of approaching the banks for either working capital or funding. If you have managed to be profitable, getting working capital can be relatively easy, however, funding for expansion will require you to share your business plans and financial projections as well as a detailed project report. Based on the viability and by creating collaterals on the purchased assets, the bank will fund you through a pure cash advance carrying a specified interest rate with a fixed repayment schedule. If you still have not reached a position, where banks will look at you seriously, you could think of approaching microfinance institutions and Non-Banking Financial Companies for debt funding, as they are less rigid and bureaucratic.
There are quite a few ways by which a start-up or an SME can access funds that will help it to grow. However, you will need to ensure that the business idea is innovative, has market potential, and you are armed with a workable business plan. You will also need to convince investors at every stage of your integrity, dedication, and professionalism.
Walter Moore is an angel founder who has been associated with a number of start-ups in the technology space. With over three decades of experience in greenfield ventures, he also writes extensively on SME finance. Some of his articles can be read on www. magma.co.in.