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Sources of Funds - Start Ups

The document outlines various sources of funding for start-up businesses, including angel investors, venture capital firms, government grants, bank loans, microfinance providers, crowdfunding, business incubators, and bootstrapping. Each funding source has its own advantages and disadvantages, such as equity surrender, eligibility criteria, and the potential for financial support. Notably, government initiatives like 'Startup India' aim to bolster entrepreneurial efforts in the country.

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15 views2 pages

Sources of Funds - Start Ups

The document outlines various sources of funding for start-up businesses, including angel investors, venture capital firms, government grants, bank loans, microfinance providers, crowdfunding, business incubators, and bootstrapping. Each funding source has its own advantages and disadvantages, such as equity surrender, eligibility criteria, and the potential for financial support. Notably, government initiatives like 'Startup India' aim to bolster entrepreneurial efforts in the country.

Uploaded by

krutikasarode1296
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Some of the popular sources of funding for start-up businesses:

• Angel Investors:

Angel investors support startups in their initial phase of growth and expansion. They are private
investors or a network of wealthy individuals sometimes with family connections. They provide financial
backing to small startups and entrepreneurs in exchange for ownership equity in the company.
Angel investors typically use their own money, unlike venture capitalists who use an investment fund.
Getting funds from angel investors means the company does not have to return the funds. This
paradoxically happens to be the biggest disadvantage to entrepreneurs as angel investors typically want
10% to 50% of the company’s equity in exchange for funding.

• Venture Capital Firms:

Like angel investors, venture capital firms help young companies that have the potential of providing
high returns. Venture capitalists are private investors who provide financial support to new companies
in exchange for an equity or equity-linked instrument.
Unlike angel investors who operate independently, venture capitalists work for private investment
companies who invest other people’s money. Contrary to the popular belief, most venture capital firms
usually do not fund startups right at their beginning phase. Rather, they fund firms that are ready to
monetize their idea. However, there are some early-stage venture capital firms that invest in such
ventures.

• Government Grants:

Grants are financial awards given by an entity to a company to aid its performance. Usually, grants are
distributed in a few stages depending on the fulfillment of certain milestones. So, if a startup fails to
meet a goal at a particular point, it may not receive the grant due in its successive stages.
Government funding is provided by both the central government and the respective state governments.
Here a special mention must be made about the ‘Startup India’ program, which was introduced by the
government of India to support the startup ingenuity of several young business enthusiasts across the
country.

• Bank Loans:

Business loans can be availed by entrepreneurs from a bank in order to raise funds. Banks offer different
types of business loans depending on the business needs. They charge an interest which is typically a
certain percentage of the total loan amount.
To give impetus to the Micro, Small, and Medium Enterprises (MSME) sector and startups in India, the
government has now started special business loan schemes that can be availed through many public and
private banks.
Though bank loans are one of the most preferred and conventional funding options, many startups face
challenges especially because of the strict eligibility criteria of the banks. The biggest advantage of bank
loans is that no equity is surrendered to the lender, helping the startups retain their ownership rights.

• Microfinance Providers and NBFCs:


Applying for a bank loan involves a lot of time and paperwork. In some cases, the borrower may have to
pledge some collateral. Hence, a good alternative to bank loans is funds from NBFCs. Non-banking
financial companies (NBFC) have flexible loan terms and less stringent eligibility criteria. Hence, they are
popular among people with urgent capital requirements or weak credit ratings.

• Crowdfunding:

It is a good alternative to raise money essential to kickstart a new business venture. It is the practice of
pitching a business idea and raising money by attracting and collecting a small amount from a large
number of people. Typically, crowdfunding is done through social media and crowdfunding websites. In
most cases there are restrictions as to who can fund a new business and how much they can contribute.

• Business Incubators:

Incubators are specially designed programs that act as catalysts helping startups to develop their
businesses. Usually, it includes a wide range of services like providing office space, management
training, networking and also, financing.
Mostly, the incubation phase is for four to eight months but in some cases it can go up to two years. To
apply for an incubation program, entrepreneurs must submit a detailed business plan.

• Bootstrapping:

It may sometimes be difficult to fund business from outside. The last option that remains is to use
personal money or gather money from family and friends. But self-funding can only be beneficial if the
initial amount needed for the business is small.

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