Financing a new business venture – All you need to know

Sitharaam Jayakumar

  • Source: Read more | 10 Dec 2021

  • Growing businesses together

There are many people who are teeming with innovative business ideas in their minds but do not know where to gather the capital necessary for putting these ideas into action. Very often we find that beginning a start-up is a very attractive proposition even for extremely young professionals who have an MBA under their belt. Again their ideas remain just ideas because of their inability to raise the monies needed. In this article, I plan to describe several ways by which an individual with a thirst for success in business can gather the finances to start their ventures.

Equity Financing:

This is the simplest among all the methods of raising finances. This kind of financing means that you can borrow money from friends, spouses, relatives, etc who become co-owners of the business along with you. There would most probably be many people in your circle who would like to board with you as co-owners. Such contributors would be a part of risk and profit-sharing.

Angel Investing:

These investors are people with a lot of money and they are normally referred to as High-Net-Worth Individuals (HNIs). They would be willing to pump money into your venture if they like your idea. In return, they generally look for ownership equity or convertible debt. These individuals would guide you through the initial stages of your business. Such investors may make a one-time contribution or inject finances into your business at regular intervals.

Venture Capitalists:

The amount of money needed to run a business varies from one business to another. If you have a requirement for a very large amount of money, then the best thing you can do is to approach venture capitalists. These are generally companies that raise monies through various means and use that to fund start-ups. These companies look for ideas that are innovative, and they generally have a lot of experience and know what kind of idea has a high chance of flowering into a profitable business. These companies are willing to invest even in small businesses that do not have a proven track record. In return for investments, they prefer compulsory convertible preference shares and compulsorily convertible debentures.

Loans From Banks / Non-Banking-Finance Companies:

Most of us probably know that banks are willing to finance companies. Non-Banking-Finance companies are another means of sourcing funds. Many of us have taken housing loans, car loans, and so on. In return banks and Non-Banking-Finance Companies are not looking to be owners of the companies. Such loans can be used for purchasing equipment, expansion, and everyday company expenses like giving salaries and other such things.

There is however a caveat in using this method of raising capital. The business owner must pay interest at regular intervals no matter how the business is faring.

External Commercial Borrowings:

These are generally non-resident lenders. Such monies can be sourced as bank loans and buyers’/suppliers’ credit and securitized instruments.

CGTMSE Loans:

The government of India has set up a trust which is known as the Credit Guarantee Trust for Micro and Small Enterprises or CGTMSE. Under this scheme, the government is willing to disburse loans up to a maximum of one crore without any credit or surety. Existing or new businesses that come under the category of micro or small enterprises can take a loan from any scheduled commercial bank, rural bank, NSIC, NEDFi, and SIDBI that have signed up with the trust. There are certain eligibility requirements for such loans.

Venture Debt:

This is a kind of debt financing that can be provided by specialized banks or non-bank lenders. The monies raised by such financing can be used for capital expenses like purchasing equipment. Unlike regular bank lending, this method of raising capital can be used by companies that do not have positive cash flows or assets.

Conclusion:

There are several other non-traditional means of sourcing monies like crowd-funding and so on. For a new start-up, it is necessary to have several good sources of money. It would be a good idea to thoroughly explore the various means for raising money before venturing into a business.

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