For modern businesses, access to capital is probably the most challenging aspect. A good and sustainable business idea cannot succeed without adequate, timely, and consistent financing, which is akin to a gale of wind for flying a kite.
Why does a business needs funding?
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Expanding business: Purchasing equipment, materials, and machinery to introduce new services and produce lines demands funds.
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Hiring more staff: Hiring suitable skillset requires paying a decent salary and benefits to attract the right talent.
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Buying new inventory: Inventory management is essential to a new business, setting up an optimum level to be maintained.
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Paying off old debt: Whether it is money raised from friends or financial institutions, debt on any business harms its potential to raise new money. Hence it is advisable to pay off old debt, which is expensive.
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Working capital: Cash being the most important component to pay off short term liabilities is the core of working capital. No business can function without adequate cash management to pay off suppliers, salaries, fixed expenses, and charges. While vendors can supply on credit, the management of the credit cycle is equally important. This is an art, which all entrepreneurs need to master over a period of time.
Different ways to fund your business
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Self-funding
This is arguably the most sought after source of capital, especially for small businesses. Self-funding a business idea can be crucial for those testing the entrepreneurial waters for the first time. Financial institutions may be a bit apprehensive to extend loans to new business owners due to the lack of a track record.
The appeal of this method lies in its simplicity: there is minimal to no paper work required. The business owner(s) pool their money and that received from friends and family. Also, the repayment terms are flexible and the interest rate is negotiable, which reduces the pressure on cash flows.
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Crowd funding
It is one of the newer forms of accessing capitals for companies in which business owner(s) raise requests on online portals to fund their plans by making small contributions. Firms can also ask for placing pre-orders once their product comes out apart from asking for making monetary contributions.
Further, a crowd funding campaign can also function as a potent marketing tool.
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Try angel investment
An angel investor is similar to a venture capital in certain aspects like taking an equity share in exchange for capital and providing mentorship. They work in networks to screen proposals.
They differ from venture capital funds as that they can provide seed funding as well as on-going support. They can provide capital to a business in its very early stages of growth, which venture capital funds generally do not do. Also, angel investors may have a longer time horizon of investment and may support a company in rough weather.
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Look for venture capitalists
A venture capital fund comprises of professionals who’re looking for investing in a young business. It is important to note though, that venture capital funding usually comes by when a business is already generating revenues and has either already exited or is about to exit the startup phase. Thus, this source of funding is apt for those businesses that have got off the ground and have potential but are too small to access capital markets.
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Business incubators and accelerators
These are programs, which support early stage companies by providing resources and services, which can help such companies. Incubator programs train early stage firms and also provide them with a network of mentors and investors as well as access to other startups.
Incubators, on the other hand, do a lot of hand holding for businesses at a very early stage of development.
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Loan from financial institutions
Financial institutions offer capital to businesses in need which can help them grow and also meet the working capital needs.
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Explore government schemes
Various government schemes under the Startup India, Ease of doing business for women and other sections of entrepreneurs are giving an easy passage to raise money for viable projects.
It is important to note that a particular avenue of capital may not be useful to all types of companies. Hence, finding the right match for a firm’s financing needs can be crucial to the success of a business.
