What is Start-Up Financing?
Every business, especially in the startup phase will need financial backup. Early stage businesses need startup financing to meet administration expenses, acquire machinery and raw materials, fund product development, etc.
Startup financing is the process of a newly established business acquiring funding through debt or equity. Startup founders usually have multiple sources of financing like banks, investors or the public.
Start-up financing helps growing businesses get the financial support they need to ensure profits. The mode of financing ranges from venture capital rounds, grants, and credit cards to business loans.
Start-Up Financing Vs Start-Up Funding
Though many choose financing and funding interchangeably there is a difference between the two. While start-up financing is the process of getting capital through equity or debt financing, start-up funding refers to the capital a business receives from its equity holder or lender. In other words, the first is the method while the second is the outcome.
Read more: Capital Financing
What are Startup Financing Options?
- Debt Financing
Debt financing refers to the act of raising capital by borrowing funds through debt issues which encompass mortgages, leases, credit cards, etc. Firms can borrow funds from financial institutions like banks as well. Debt financing comes with a specific repayment tenure. Firms will also have to bear interest. Failing to repay the borrowed amount can lead a firm to bankruptcy and negative credit ratings.
- Equity Financing
Equity financing refers to the way firms raise capital by selling shares. It is an effective method which helps businesses meet liquidity needs. The notable advantage of equity financing is that firms do not have the liability to repay the amount gained through it. Equity financing is one of the most-sought financing choices for entrepreneurs who are denied loan options from traditional lenders.
- Net Earnings financing
Net earning financing enables businesses to use their additional profit for funding different business operations. In this financing choice, firms can easily use their revenue to raise capital without taking a debt or issuing any equity. Albeit, it is the most cost-effective financing option. However, it is not usually accessible to businesses which have just stepped into the market.
Different Options of Financing Available for a Startup
- Business Term Loan
Business term loan refers to the lump sum fund that small business or start-up owners can borrow from financial institutions to back their day-to-day operations. It is one of the popular debt financing options that comes with fixed repayment tenure at interest rates higher than secured loans such as a loan against property.
- Personal Loan
Another effective way start-up sectors can gain substantial financial backup is by applying for a personal loan. It is a versatile credit option that will allow businesses to use the sanctioned amount for any purposes (like for expanding business premises, equipment and inventory purchase etc). However, to qualify for this credit choice, borrowers must possess a considerably high credit score.
- Business Credit Card
A business credit card just like a personal credit card can be used by business owners to make business purchases. It is considered ideal for regulating cash flow, spreading costs and keeping a record of business expenses.
Crowdfunding refers to the process of raising funds via many potential investors through a credible crowdfunding website. It is one of the cost-effective ways of raising capital where multiple individuals collectively fund a new business initiative. Crowd-funding platforms enable start-ups to collect small investments from different investors rather than relying on one investment source.
Factoring is another means of start-up financing where business entities sell their account receivables to a commercial finance firm at a concession with the perspective to boost their working capital and ensure better cash flow. This factoring process lowers the expenses of a business body that is generally linked to credit verifications, bookkeeping, etc.
- Reaching to Friends and Family
Start-ups can find it difficult to gather funds in the initial days. At that time it can be easy to opt for financing from friends and family members. Borrowing from them can result in a much more affordable interest rate. It will help in lowering the debt level and ensure more funds to back business operations.
- Angel Investing
Angel investors are private investors who are willing to extend capital to small businesses to help them get off the ground. In this, the investors extend the fund in return for a stake. However, firms are liable to pay a portion of their profits to angel investors. They also reserve the right to monitor and supervise the management practices of a firm. It is through networking you can come across angel investors.
- Government Grants and Subsidies
Entrepreneurs can seek different government grants and subsidies to back business operations. Grants are extended to different demographics or industries. It can also be designed for especially women-owned startups. Business owners must abide by the varied terms of the grant to make the most of it. They must also be aware of the eligibility norms to qualify for government subsidies.
- Vendor Financing
As the name suggests, vendor financing refers to the process by which vendors/ material suppliers lend money to businesses. The fund is then used by the business to purchase products or services from the same vendor. So, there’s no need to make the payment of raw material immediately in this type of start-up financing, the credit period can extend up to 30 days, 45 days or even 60 days.
Importance of Startup Financing
Securing financing for a new business is the single most important obstacle a founder will have to overcome. Especially in times of recession or funding winters, most small business founders struggle with getting financed.
Read more: Funding Winter
Advances in fintech and business banking platforms mitigate such issues with a plethora of financial services. From securing loans to managing payroll, these neo-platforms are quickly solving all finance issues that startups faced.
Platforms like RazorpayX allow startups to automate tedious tasks like invoice management, vendor payments, payroll and more – practically every facet of startup finance has been made smoother and easier.
Budding entrepreneurs can also access the forex funding facility powered by RazorpayX. It is led by a team of forex experts who helps business bodies get detailed insight into forex rates and ensures a transparent foreign capital inflow.
What are the main ways start-ups can raise working capital?
The three ways founders can boost their working capital are via debt financing, equity financing and net earnings financing.
Can business owners acquire necessary capital via equipment financing?
Yes, equipment or machinery financing is an effective credit facility that will allow both small-scale and large business enterprises to get hold of necessary equipment and machinery or upgrade the same to thrive in a competitive business market.
How does venture capital help start-up sectors get funds?
Venture capital refers to professionally managed funds that are extended to small businesses or start-ups that have exceptional potential to flourish. In addition, venture capital firms help startup sectors with strategic assistance, and introduce them to potential partners, employees and more.