Capital is a basic requirement of running a business. Business loans can be taken for traditional as well as non-traditional businesses. And there are traditional and non-traditional ways of raising capital. It is the job of the Chief Operating Officer of the company to raise capital. When raising capital in the early stages of a startup, there are three major stages to raise capital under venture capital- Seed Capital, Early-Stage Capital and Mid-Stage Capital. After these stages, the Corporate Stage has three more stages- Late-stage growth, Leverage Buyout and Mezzanine.
At every stage of business, funding is required. However, it is especially required at the initial stage as startup capital for business. To meet various requirements starting from daily expenses to expansion of business, capital is needed. The various categories mentioned above have various slabs of capital that need to be raised.
For what types of startups, funding is required?
Various types of startups require funding. The changing business scenario has opened up many ways of gathering funds for startups. There are a few major types of startups for which capital is raised. These businesses/startups are different from the traditional ones. Generally it is the following types for which capital is raised.
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- App or website development- This startup is one of the most popular in the business domain. An app or website is a virtual shop for a product or service and the development of which requires funding.
- Procuring raw materials and equipment- No business or industry can work without the basics. Raw materials and equipment form the basis of industries for which capital is required.
- Marketing and Sales- A product or service cannot reach the customer if it is not known to the customer. And marketing and sales is the only way through which it can be made known. Even business loans are taken to cover the cost of marketing and sales.
- Legal and consulting services- This is a particular arm of any business which is striving to make it big in their segment. Legal issues can drain any company of resources and even the profits might not be able to cover the expenses incurred.
- Certifications and licensing- Any legally run business has to have certifications and licensing so that it can run smoothly. Some of these certifications and licenses are costly. To cover the costs, funding is required. Sometimes business loans are taken to cover these costs.
Sources of raising capital for your business
- Crowdfunding- When a large number of people pool in money for a business or venture done typically via the Internet, it is called crowdfunding. It is alternative finance which is better than taking a business loan. It is kind of an investment that is made in projects/businesses in which people believe. Websites such as Indiegogo and Kickstarter help raise funds through online campaigns. For entrepreneurs with new ideas about a new product prefer to raise startup capital for business through crowdfunding instead of taking business loans.
- Bootstrapping- Bootstrapping is a fancy term for self-funding. Investing your own capital in your own venture can be a bit nerve-wracking at first because the capital you will put in your business will actually be your wealth. But the plus side of this is the fact that you will be debt free. No business loan is taken towards pumping money into the business.
- Venture Capital- In raising capital through venture capital, mainly three stages are involved- Seed Capital, Early-Stage Capital and Mid-Stage Capital. The purpose of raising capital under the sub-categories of Venture Capital are different. At the seed capital stage, the capital is raised to develop the product. At the early-stage capital, the capital is raised mainly to focus on marketing and sales of the product and also to tap the market better. In the mid-stage capital, the capital is raised for expensive hires and moving to newer markets.
- Angel Investment- An angel investor is generally a near and dear one who makes an investment in the project or business not to make hefty profits but to help in kick starting the business. A high net worth individual makes investment in exchange for equity in the company. This type of investment attracts lesser day-to-day interference and small amounts of capital can be raised in a relatively lesser amount of time as compared to other routes.
- Business Loan- This is a major source of capital for businesses. Banks and some Non-Banking Financial Companies lend to corporates as capital for business. The interest charged depends upon the risk factors- the riskier the business, costlier is the loan. Any business requires capital to start their business. Also to run day to day operations right at the beginning is quite difficult. For this, capital is raised.
- Government Schemes- There are various government schemes which help businesses raise capital. The most prominent among these schemes is the Startup India- Standup India Scheme. This scheme specifically caters to the startup businesses and helps them raise capital. This scheme was launched in 2015 which had the effect of multiplying the MSMEs and encouraging startups. For companies with turnover of less than Rs. 25 crores, loans can be availed under this scheme by submitting a business plan.
- Non-Banking Financial Companies- NBFCs provide loans but do not accept deposits. This makes their loan lending ability to be a little less risk prone. Some of the NBFCs engaged in lending to startups are Power Finance Corporation Limited, Bajaj Finance Limited, Mahindra & Mahindra Financial Services Limited etc. These NBFCs provide business loans or startup capital for business. NBFCs provide long term loans at low rates of interest.
- Grants- Grants are often given as startup capital by various government agencies and private foundations. Depending upon how appealing the plan is to these agencies, funds are directed towards businesses. In this case, the reputation of the owner as well as the company is also taken into account. It is different from taking a business loan as collateral is not required. Convincing on the part of the company matters more.
The above mentioned are some of the ways to raise startup capital for business. The way business is done has changed and the way capital is raised has changed too. Business loan along with crowdfunding, venture capital and angel investment are the most preferred methods of raising capital.
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