Wednesday, June 23, 2021

WHAT ARE THE METHODS OF FINANCING?

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Bootstrapping:

Bootstrapping is called self-starting your company without any external individual funding your company. At the beginning of each venture, it is important to determine whether the company can be self-financed by the use of savings, family or friend borrowings, personal finance sources such as credit cards, etc. There is no need to involve other investors if the company can be bootstrapped because the same will come at an expense, involvement, and enforcement. However, to an extent, you can self-finance your company, and beyond a point, for larger funding, you will have to turn to other means of financing. Besides, bootstrapping often comes at the cost of wiping out your savings.

Bank Loans:

Bank loans are the second easiest way for small businesses to finance their business, and the most frequently chosen alternative. In India, there are many large public sectors and private sector banks with normal borrowing terms and business funding regularly. However, for simpler borrowing and more power to negotiate the terms, one can also opt to be funded by Small Banks and Co-operative Banks. All bank loans, however, require protection against the loan to be offered and, thus, typically do not engage in seed or series financing. Business funding for the purchase of land and construction or plant and machinery can be easily obtained from banks by providing the purchased underlying asset as loan security. If the loan is repaid, the bank has a lien on such an asset.

Microfinancing:

India has a wide range of Non-Banking Financial Companies (NBFCs) and other types of microfinance institutions, aside from the formal banking system, that provides different types of loans similar to those provided by banks. Though banks are regulated by the Reserve Bank of India ( RBI) and comply with its requirements, microfinance companies are not regulated and so, subject to compliance with eligibility criteria and a good credit score, the terms of loans can be negotiated here. In general, microfinance institutions ease the lending process and require lower paperwork, quicker processing, and better customer care, but they still charge a higher interest rate and higher processing fees compared to banks.

Line of Credit

Although in one big outgo, your capital investments can occur, other expenditures do not occur the same way. When you buy a bank loan, though, the interest rate starts right from that day because the funds lie with you unused. You can apply for a line of credit to avoid certain expenses, a bank loan where the bank provides you with a credit limit that you can use if and when you require and also repay when you collect funds and only pay interest on the outstanding sum. The credit line can take different forms, such as cash credit, overdraft, etc. The method of acquisition is equivalent to a loan from a bank. This option of funding is useful in financing your requirements for working capital and short-term needs.

Venture Capital

Whereas banking and non-banking institutions provide repayment financing along with interest, some private investors provide equity financing. These investors are known as Venture Capitalists (VC) who, after assessing their potential and in anticipation of extravagant returns in the future, take massive risks by investing in startups that are at the early stages of their market. Financing from venture capitalists is hard and in order to secure funding from such investors, you need to have a compelling concept or a startup. Therefore, to secure financing from venture capitalists, an entrepreneur must plan and provide a comprehensive pitch on the business concept and prospects. This funding typically proceeds according to market requirements in various rounds and investors discuss their terms and conditions for such funding. By being an equity investor, the venture capitalist will support all major business decisions and also have a say in the company’s future direction.

Accelerators and Incubators

Accelerators are an organisations run by professionals that help you to develop and improve your current company. Incubators, on the other hand, are also organisations managed by professionals, but they work to assist entrepreneurs at the stage of the concept and turn it into a viable business model. In return for a small portion of the equity in your venture, both organisations serve as mentors for entrepreneurs and coordinate projects, assist in fundraising, and build hubs for different start-ups to help grow together. Most accelerators and incubators also have office space before the design is turned into a match for the product market. These companies, though, are tough to get into, similar to venture capitalists, and incubators or accelerators will weigh all the company’s prospects before approving the application.

Angel Funding

Similar to venture capitalists are angel investors who also invest in startups for a share of equity, however, while venture capitalists are companies procuring funds from other investment companies, angel investors are people who have excess funds available with them and desirous of earning returns by investing in other businesses. Investment levels are not as high as in the case of venture capitalists, but investments here are based on the investor’s preferences, so they often invest at the seed stage of a company and prefer to take higher risks.

Capital Market Funding

Capital markets will help you raise funds directly from the public, rather than institutional investors, when a company has entered the maturity stage and you want to push it further forward, grow exponentially or repay your debt by raising equity. This enables you to increase financing if required by listing the company on the stock market via the ‘Initial Public Offering (IPO)’ phase. This alternative, however, includes valuations by merchant bankers, compliance with the regulations of the SEBI and Stock Exchange, the appointment of an IPO registrar, contacting banks for shares, etc. This makes this funding option more costly than any other approach discussed here. There is no question that only about 5,000 companies out of the millions of companies in India are listed on stock exchanges.

Debt Market Funding

When new shares are sold to the public, capital market financing results in ownership dilution. In the funding of the debt market, however, capital may be collected directly from the public by selling bonds or debentures that pay interest at a fixed rate without diluting ownership. However, similar to capital market financing, high enforcement costs were also involved in this option. Furthermore, daily payment of interest similar to bank borrowings is applicable here, except that the company does not demand payment of instalments of the principal. The company has a pre-declared option on the expiry date to either repay the entire sum or turn the same into equity.

Government support

The Government of India has also initiated programmes such as ‘Startup India, stand up India’ to promote the financing of eligible start-ups in India. Under the scheme, a business may achieve ‘DPITT Recognition’ and take advantage of different benefits. Under this initiative, the government has also begun designing its accelerator and incubators. ‘Pradhan Mantri Mudra Yojana (PMMY)’ is another government programme that encourages small business loans of up to INR 10 lakh. Various ministries also provide government-supported grants for investment in plants and equipment and other initiatives that can help minimise project costs.

Crowd-funding

The Internet is a magical place and a recently created idea is crowdfunding. You may ask the crowd to finance your startup or else even take pre-orders if you have a concept, product, or service that you feel people would support or be interested in purchasing. This idea is gradually growing and the internet has become the gateway to the same thing. You may reach out and ask your prospective customers to finance or pre-order the items. You can raise considerable funds to finance your venture, apart from the other funding options, if people love your idea or the product.

SOURCES OF BUSINESS FINANCE

Crowdfunding, VCs, digital networks, and even retail investors provide a plethora of funding strategies that make it easier for companies to start up and succeed today. The questions that you need to ask yourself are:

  • How prepared are you to take advantage of the opportunities?
  • Which is the right source of business finance for you?
  • Do you have a robust business plan and a clear roadmap to drive growth?

Once you have a clear vision, the above methods of financing can turn your entrepreneurial dream into reality.

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