Types of Funding for Startups in India

The article talks about different types of funding that startup ventures can seek to grow and promote their businesses.

One of the points to consider in all business projects is financing and its sources. Although self-financing and bank financing continues to be fundamental pillars for obtaining financial funding, numerous alternatives have now emerged that provide greater flexibility and better conditions in general for SMEs. In this article, we quill cover different types of funding that startups can eye for, to start their business functions. 

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Content

1. Bootstrapping
2. FFF
3. Seed Funding
4. Public Funds
5. Crowdfunding
6. Angel Investors
7. Bank Financing
8. Venture Capital
9. Private Equity
10. Leasing
11. Factoring or Invoice Discount

Bootstrapping 

Bootstrapping is when an entrepreneur starts a company with personal savings, including borrowed or invested funds from FFF and income from initial sales. Self-funded businesses do not rely on the support of investors, public funds, crowdfunding or bank loans. Rather, entrepreneurs must “pull themselves up by their bootstraps” using their capital to launch.

For example, a bootstrapped company can take preorders for its product and use that generated amount to build and deliver it.

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FFF

Every year, 35-40% of startups receive capital from friends and family. The well-known “Friends, Family and Fools” is, normally, the first source of financing that every company turns to in its beginnings. This form of financing uses the savings of the entrepreneur and the help of family and friends who trust the business project they are working on.

Seed Funding

Also known as seed financing, company shares are offered to investors so that they acquire a part of the business in exchange for capital. Apart from the FFF, seed capital comes from Angel investors and crowdfunding. 

Seed capital is one of the sources of financing for a company that provides initial support so that a business can start its operation and consolidate. It is usually oriented towards new companies, offering innovative products or services, incorporating new technology or addressing new market niches.

Public Funds

Public funds are government expenditures focused on public goods and services programs. It refers to any money a public entity receives from appropriations, taxes, fees, interest, or other ROI. The Public Account of India tracks the transaction flows, where the government only serves as a banker. 

Some examples of public funds in India are – 

• Pradhan Mantri Mudra Yojana (PMMY)
• Startup India Initiative
• Startup India Seed Fund Scheme
• Qualcomm Semiconductor Mentorship Program (QSMP)
• ATAL Innovation Mission.
• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
• Single Point Registration Scheme.
• Modified Special Incentive Package Scheme (M-SIPS)

Crowdfunding

Crowdfunding is one of the most popular forms of financing companies, startups and projects contributing to the common good. The term can be broken down into two terms, crowd + funding. In such type of funding, you reach out to a crowd who can collectively provide the necessary amount to fund your venture. Crowdfunding is about raising small amounts of money from many different sponsors to get the overall sum you need. 

Angel Investors

An “angel” investor offers capital and knowledge to a company or startup through financing. In exchange, you will receive a profit in the future, which usually translates into a shareholding in the company. Angel investments are normally the second financing round for startups with high growth potential.

Must Read – Learn All About Angel Investment

Bank Financing

There are different bank financing instruments that a company can resort to have the necessary capital flow in its daily operations. However, to receive this type of loan, a company must meet many requirements and conditions before becoming a financing creditor and offer guarantees that guarantee the amount.

Finally, the interest rate on this type of loan is high, so it is advisable to think carefully if a company wants to assume this type of financing.

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Venture Capital

Venture capital financing is provided by private funds to companies or ventures with high growth potential. These funds manage and contribute capital from individuals, companies or institutions, investing in innovative companies or startups with great possibilities to be successful.

In exchange for this financing, venture capital funds receive a direct shareholding in the company, usually 20-30%. They also usually acquire voting rights in relevant company decisions and a position on the board of directors. 

Once the success of the projects has been achieved, the venture capital companies withdraw their investment by selling their shares to other interested members or on the stock market if the case arises, obtaining the high returns sought from the beginning.

Private Equity

Another financing possibility for companies with a certain size, traction and growth potential is through private capital sources, also known as private equity. Unlike venture capital, private equity funds tend to invest in all types of companies, with larger amounts and acquiring a greater percentage of the companies where they invest.

In addition, these funds tend to invest in a smaller number of companies since they take more into account the risk they assume with each of them while investing large amounts of capital; therefore, they also expect a higher return on investment than in VCs.

Related – Venture Capital vs Private Equity – Learn the Differences

Leasing

A lease is a contract summarising the terms according to which one party agrees to rent an asset another party owns. 

Instead of opening a loan and putting down a downpayment, startups often lease their initial business equipment. They may even continue to lease after revenue makes buying possible. Equipment leasing has numerous benefits for a startup, from flexibility to liquid cash flow.

This rental contract incorporates a purchase option for the lessee to be exercised at the end of the contract. 

There are four types of leases – 

• Gross lease
• Modified gross lease 
• Triple net lease
• Bond lease

Factoring or Invoice Discount

For those companies that sell on credit, there are much more convenient financing options for their needs. The problem is that companies that sell for 30, 60, 90 or more days require capital to continue operating or growing. However, they need the necessary liquidity due to their accounts receivable.

With the discount or advance of invoices or factoring, for example, a company can have credit immediately in addition to reducing the risk of non-payment of its customers. 

Some online lenders and fintech companies provide factoring services, like IFCI Factors Ltd., SBI Global Factors Ltd., Siemens Factoring Private Limited, Bibby Financial Services (India) Pvt. Ltd., etc. The Reserve Bank of India (RBI) is the regulatory body supervising the factoring business. 

However, the processes have been streamlined with the advent of online financial services platforms. The costs of this type of operation are reduced, making it a highly recommended option for small and medium-sized companies.

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