Receiving funding for a business can always be challenging no matter what the economic and business conditions are. Once you realize you cannot bootstrap your business any longer you are then torn between whether to go for equity funding options or debt funding options. If you are confused between whether you should give up equity to take on more fund or take on debt with interest to expand your business, read further on to know the different ways to finance your business.
The basic option – Debt v/s Equity
In simple means, there are two ways to fund your business, either through debt or through equity. Under these two umbrellas are further on variations with permutations and combinations to form different forms of funding.
Debt – Debt is simply borrowing money from a money provider in exchange of interest and principal at the end of the tenure. A debt can be secured or unsecured based on the terms. While opting for debt funding, the borrower is still the whole owner of the business.
Equity – Equity is selling a part of your business in exchange for funding. In this option, the lender giving the money in return gets a stake in the business in the ratio of the money lent depending upon the terms. Many times business owners end up giving too much equity and losing control over the business.
Now let’s talk about these options in depth:
- Friend and Family – After putting in your savings and bootstrapping your venture as much as you could, the next most common option is friends and family also known as the F&F round. This usually means your loved ones lending you money for a business they might see as successful. Pros of this method of funding usually mean you won’t be charged interest but cons would be not being able to repay the loan hence ruining relations.
- Factoring – This is a really common and professional mean of easing the fund required for a business. In factoring, a service provider will give you the fund upfront for bills that have been invoiced but not as yet collected. This option is great if your business works on a credit basis and you need money upfront. The process and risk of collection of bills are then passed onto the service provider for a fee.
- Credit Cards – We often refer to the term credit cards for personal use. However, a credit card can go a long way in funding your business. The approval for a credit card can be done in no time and is hassle free. With that, the growing competition, there are many credit card service providers who will not only provide interest at a nominal fee but also give you additional perks with your credit card.
- Angel Investors – This stage of investing is a form of equity investing where you present your business plan to a few funds or HNI individuals. This funding is usually done at the most initial stage of your business and the investors could take a good chunk of your business equity. However, for a business that requires heavy funding and professional advisors, angel funding can work wonders for your business.
- Business Loan – This must be one of the first options that would’ve crossed your mind. Getting on a business loan to fund your business seems ideal at a good interest rate and if your business can take on such debt on the books of accounts. A business loan can also give you some sort of tax exemption which again works in your favour. However, banks have become quite strict with their business loan for new business approvals and hence you need to have a strong loan application to get the approval.
- Crowdfunding – Websites like Kickstarter and Indiegogo have helped raise money for products for which an entrepreneur cannot fund himself. This method not only helps with funds but does not have an interest component attached to it, nor does it require to give up any capital. It also helps to validate your business idea as many people give suggestions and ideas. While this idea is still picking up in India, its success can go a long way.
- Line of Credit – A line of credit works pretty much on the basis of providing a revolving facility of cash as and when required and paid back on regular basis, on similar lines like a credit card. A line of credit when approved can be extremely beneficial to the entrepreneur as it takes off the stress for worrying about cash and concentrating on the business. However, attaining a line of credit can be difficult and is given out to companies with a strong track record.
- Government Schemes – With the start-up culture finding its way into the Indian markets and economy, the government has been very helpful in this sector. The government has come up with a few schemes that help in attaining funds for your business or help in tax deductions. There are also special funding for women entrepreneurs and for social entrepreneurship. You can look into the different schemes provided by the government here.
- Contests – This is a great way to fund your business without taking on further debt giving up a part of your business. There are many entrepreneurial contests which require presentations to investors who the then fund out the money to the winner. Conthe tests could be for small business platforms, women entrepreneurship or social platforms.
- Microloans – While you have tried securing a bank loan for your business but even after the tedious process, you’ve been rejected? Don’t worry, with the boom of microloans and microfinance there are now institutes who give out SME bank loans to entrepreneurs without the hassle and quick process. Microloans are mostly up to Rs. 1 crore and do not require documentation. This is a sure shot for your funding at very nominal interest rates.