8 Sources of Start-up Financing for your Business in India

Starting a business may appear enthralling but running it may not be that easy, especially for startups with inadequate funds. Money is bound to be an issue in a business sooner or later.

At the same time, utilizing personal assets to fund business needs may not be very wise. So, while considering funds from external sources, it is important to pick carefully the ideal funding option depending on the need.

Here are some of the popular sources of funding for start-up businesses:

• Angel Investors:

Angel investors support startups in their initial phase of growth and expansion. They are private investors or a network of wealthy individuals sometimes with family connections. They provide financial backing to small startups and entrepreneurs in exchange for ownership equity in the company.
Angel investors typically use their own money, unlike venture capitalists who use an investment fund. Getting funds from angel investors means the company does not have to return the funds. This paradoxically happens to be the biggest disadvantage to entrepreneurs as angel investors typically want 10% to 50% of the company’s equity in exchange for funding.

• Venture Capital Firms:

Like angel investors, venture capital firms help young companies that have the potential of providing high returns. Venture capitalists are private investors who provide financial support to new companies in exchange for an equity or equity-linked instrument.
Unlike angel investors who operate independently, venture capitalists work for private investment companies who invest other people’s money. Contrary to the popular belief, most venture capital firms usually do not fund startups right at their beginning phase. Rather, they fund firms that are ready to monetize their idea. However, there are some early-stage venture capital firms that invest in such ventures.

• Government Grants:

Grants are financial awards given by an entity to a company to aid its performance. Usually, grants are distributed in a few stages depending on the fulfilment of certain milestones. So, if a startup fails to meet a goal at a particular point, it may not receive the grant due in its successive stages.
Government funding is provided by both the central government and the respective state governments. Here a special mention must be made about the ‘Startup India’ program, which was introduced by the government of India to support the startup ingenuity of several young business enthusiasts across the country.

• Bank Loans:

Business loans can be availed by entrepreneurs from a bank in order to raise funds. Banks offer different types of business loans depending on the business needs. They charge an interest which is typically a certain percentage of the total loan amount.
To give impetus to the Micro, Small, and Medium Enterprises (MSME) sector and startups in India, the government has now started special business loan schemes that can be availed through many public and private banks.
Though bank loans are one of the most preferred and conventional funding options, many startups face challenges especially because of the strict eligibility criteria of the banks. The biggest advantage of bank loans is that no equity is surrendered to the lender, helping the startups retain their ownership rights.