Financing Options for New Business Ventures

It is no mystery that finance is the lifeblood of any business be it small-scale or large-scale. A Case in point is the self-funded or bootstrapped ventures, which require a timely influx of funds to survive. It’s considered rare which a startup born out of a founder’s brainwave, and also backed by a strong idea, would also require its own personal treasure trunk. Business loan for new ventures can be a daunting process, however, this is exactly why angel investors, venture capitalists, and other financing options available to startups are considered so crucial.

For a first-time businessman or a bidding entrepreneur though, the world of funding seems a task complex and challenging. So, let us try to dive deeper and have an in-depth knowledge and understanding of financing options available to startups and how they, as a founder, can leverage this knowledge to fund your next venture:

The funds that one obtain can be essentially broadly categorized as

Equity Financing

To raise funds equity means board with the person as co-owner. Such a person shall essentially contribute to multiple business capital, share risk as well as participate in profit sharing.

Ready to share the profits? One must read on to understand more:

Startups are considered equity financed or funded by way of venture capital and private equity investors or angel investors.

Angel Investors

Angel Investors are considered real-life business angels to have deep pockets. These are the known as High Networth Individuals abbreviated as HNIs who, if they have strong conviction in their product, will be strongly willing to fund the venture in return for ownership equity or taken as a convertible debt.

The capital angel may offer a one-time investment to assist in propelling the business or injecting funds on an ongoing basis to support as well as carry the company through its difficult or hard going early stages.

SEBI (Alternative Investment Funds) Regulations, 2012, as amended in 2013, regulates angel funds investing in an Indian company.

Restrictions which are imposed on angel funds are included as followed:

A maximum of 200 funds can be invested in one scheme (the earlier limit was 45)
The investee company must not be older than five years of age(earlier it was three years)
To Lock-in period of investment is about a year (earlier it was three years)

Venture Capitalist/Private Equity

To expect a large investment? One must go to Venture Capitalists. Venture Capitalists are companies or funds that often raises funds from multiple sources and use the corpus to extend fund startups. To get a business loan in kolkata,they are easily ready to invest in small businesses, funding young, unproven companies which appear to have a greater idea and a superior management team.

Venture Capitals usually offer convertible instruments that includes compulsory convertible preference shares as well as compulsorily convertible debentures.

Debt Financing

To Loan from Banks & NBFCs

Banks and Non-Banking Financing Companies such as NBFCs grants loan and become business leaders and not owners, such as VCs and angels. These kinds of loans so procured can be used for multiple business needs like:

Purchase of inventory as well as equipment
Operating capital such as working capital
Fund requirement for expansion etc

Moreover, these are several drawbacks to this funding option. The interest on the loan has to be paid periodically irrespective of how the business is faring. The bankers often ask for substantial collateral and one would require to prove an exceptional credit record along with fulfillment of other T&C.

External Commercial Borrowings

Funds can also be essentially obtained from various non-resident lenders commonly called External Commercial Borrowings such as abbreviated as ECB. The multiple forms in which ECSs can be procured are:

Bank loans
Buyers’/Suppliers’ credit
Securitized instruments such as non-convertible, optionally convertible or partially convertible preference shares, floating rate notes, and fixed rate bonds, etc)

Such ECBs can be accessed under two kinds of routes, viz.,

(i) Automatic Route; and (ii) Approval Route depending upon the category of the eligible borrower and recognized lender, the amount of ECB availed, average maturity period, and various applicable factors.

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