Financing Options Available to Startups

Finance is the lifeblood of any business. Case in point is the self-funded (bootstrapped) ventures, which need a timely influx of funds to survive. It’s rare that a startup born out of a founder’s brainwave, and backed by a strong idea, would also have its own personal treasure trunk. This is exactly why angel investors, venture capitalists, and other financing options available to startups are so important.

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

The funds that you obtain can be broadly categorized as

Equity Financing

Raising funds equity means board with you as co-owner. This person shall contribute to business capital, share risk and participate in profit sharing.

Ready to share your profits? Read on:

Startups are usually equity financed/funded by way of venture capital/ private equity investors and(or) angel investors.

Angel Investors

Angel Investors are real-life business angels having deep pockets. These are the High Networth Individuals(HNIs) who, if they have conviction in your product, will be willing to fund your venture in return for ownership equity or convertible debt.

The capital angel may provide a one-time investment to help propel the business, or inject funds on an ongoing basis to support and carry the company through its difficult early stages.

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

Restrictions imposed on angel funds are:

• Maximum of 200 funds can invest in one scheme (earlier limit was 45)
• The investee company should not be older than five years (earlier it was three years)
• Lock-in period of investment is one year (earlier it was three years)

Venture Capitalist/Private Equity

Expecting a large investment? Go to Venture Capitalists. Venture Capitalists are companies/funds that raise funds from various sources and use the corpus to further fund startups. They are ready to invest in small businesses, funding young, unproven companies that appear to have a great idea and a great management team.

VCs usually prefer convertible instruments which include compulsory convertible preference shares and compulsorily convertible debentures.

Debt Financing

Loan from Banks & NBFCs

Banks and Non-Banking Financing Companies(NBFCs) grant loans and become business leaders and not owners, unlike VCs and angels. These loans so procured can be used for various business needs like:

• Purchase of inventory and equipment
• Operating capital (working capital)
• Fund requirement for expansion etc

However, there are several drawbacks of this funding option. The interest on loan has to be paid periodically irrespective of how your business is faring. The bankers ask for substantial collateral and you need to prove a good credit record along with fulfillment of other T&C*

External Commercial Borrowings

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

• Bank loans
• Buyers’/Suppliers’ credit
• Securitized instruments (e.g. non-convertible, optionally convertible or partially convertible preference shares, floating rate notes and fixed rate bonds etc) 

These ECBs can be accessed under two 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 other applicable factors.

CGTMSE Loans

The Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Trust for Micro and Small Enterprises MSE) scheme to encourage entrepreneurs.

Under the scheme, one can get loans of up to 1 crore without collateral or surety. Any new and existing micro and small enterprise can take the loan from all scheduled commercial banks and specified Regional Rural Banks, NSIC, NEDFi, and SIDBI, which have signed an agreement with the Credit Guarantee Trust.

Check your eligibility as a borrower HERE

Venture Debt

It is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Venture debt can compliment venture capital and provide value to fast-growing companies and their investors. Unlike traditional bank lending, venture debt is available to startups and growth companies that do not have positive cash flows or significant assets to use as collateral.

These are some funding options that can help you meet your financial needs. There are some other Unconventional modes of financing options which are now becoming popular in India such as Crowdfunding, approaching incubators etc. We will explore the other options on next blog.