3 Things to Keep in Mind While Deciding the Funding Path for Your Startup

Source | Entrepreneur : By Baishali Mukherjee

Getting funds for a business is challenging irrespective of the prevalent economic climate of the country or region. Be it capital for a start-up, or for expansion or for tiding offer difficult times, securing funds remains a tough affair.

The boom in entrepreneurship and start-ups have initiated alternative financing methods and today a number of financing options and routes are available for start-ups and small businesses. However, it is important to know and understand that the feasible methods of financing a venture will vary from business to business.

Options to raise funds in India

Crowd-funding (gift based) – family and friends

Seed-Angel Investment – 10L to 1CR

Incubator/Accelerator Program – 10L- 30L

Angel Investment Networks – 30L upwards

VC/PE Ventures – mostly 1 crore upwards

Traditional Bank Loan on profitability and cash flow

SEDBI –many schemes starting from 1L

“The sheer variety of funding option for start-up businesses these days can be misleading,” shared Alok Patnia, Founder & CEO, “It also becomes difficult to decide the category of funding which will be right for you. The good news is that one can easily understand the variety of options that exist in the market today,” he added.

What to raise?

It is now a well-known fact that based on the type of business, one should decide whether he / she should go for Equity or Debt. According to Patnia, “debt does not dilute ownership in the company, unlike equity, as debt must at some point be repaid.

“While taking a decision on loans one has to keep in mind that interest is a fixed cost which raises the company’s break-even point. Also high interest costs during difficult financial periods can increase the risk of insolvency. Cash flow is required for both principal and interest payments and must be budgeted for. Also the larger a company’s debt-equity ratio, the more risky the company is considered,” he notified.

It has also been seen that debt instruments often contain restrictions on the company’s activities, preventing from pursuing alternative financing options.  Besides, pledging of assets of the company is required as collateral, and business owners are in some cases required to personally ensure repayment of the loan.

“The good thing about debt is it ensures ease of operations as the company is not required to send periodic reports to investors, hold periodic meetings of shareholders, and seek the vote of shareholders before taking certain actions. However, the debt funding typically should be accessed only after 3-4 year of operations,” Patnia pointed out.

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