Anonymous
Asked March 11, 2017

Options to raise capital for starting business

  • 3 Answers
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My husband has experience in paint industry for more than 11 years. He wants to set a business of paint dealership.He needs capital to do that, what are the options?

Answers 3

To raise money for your business, you have a number of options. Seeing your limitations and goals you can go for any of them.

  • Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organisation is going, evaluating the business from the sustainability and scalability point of view.

A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues. Fast-growth companies like Flipkart, Uber, etc with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company quickly.

However, there are a few downsides to Venture Capitalists as a funding option. VCs have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window. If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.

  • Early stage businesses can consider Incubator and Accelerator programs as a funding option. Found in almost every major city, these programs assist hundreds of startup businesses every year.

Though used interchangeably, there are few fundamental differences between the two terms. Incubators are like a parent to to a child, who nurture the business providing shelter tools and training and network to a business. Accelerators so more or less the same thing, but an incubator helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap.These programs normally run for 4-8 months and require time commitment from the business owners. You will also be able to make good connections with mentors, investors and other fellow startups using this platform.

 

  • Normally, banks are the first place that entrepreneurs go when thinking about funding.

The bank provides two kinds of financing for businesses. One is working capital loan, and other is funding. Working Capital loan is the loan required to run one complete cycle of revenue generating operations, and the limit is usually decided by hypothecating stocks and debtors. Funding from bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned.

Almost every bank in India offers SME finance through various programs. For instance, leading Indian banks – Bank Of Baroda, HDFC, ICICI and Axis banks have more than 7-8 different options to offer collateral free business loans. Check out the respective bank sites for more details.

  • The Government of India has launched 10,000 Crore Startup Fund in Union budget 2014-15 to improve startup ecosystem in India. In order to boost innovative product companies, Government has launched ‘Bank Of Ideas and Innovations’ program.

Government backed ‘Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA)‘ starts with an initial corpus of Rs. 20,000 crore to extend benefits to around 10 lakhs SMEs. You are supposed to submit your business  plan and once approved, the loan gets sanctioned. You get a MUDRA Card, which is like a credit card, which you can use to purchase raw materials, other expenses etc. Shishu, Kishor and Tarun are three categories of loans available under the promising scheme. 

Also, different states have come up different programs like Kerala State Self Entrepreneur Development Mission (KSSEDM), Maharashtra Centre for Entrepreneurship Development, Rajasthan Startup Fest, etc to encourage small businesses. SIDBI – Small Industries Development Bank Of India also offer business loans to MSME sector.

  • Issue of Shares- It is the most important method. The liability of shareholders is limited to the face value of shares, and they are also easily transferable. A private company cannot invite the general public to subscribe for its share capital and its shares are also not freely transferable. But for public limited companies there are no such restrictions. There are two types of shares :-
  • Equity shares :- the rate of dividend on these shares depends on the profits available and the discretion of directors. Hence, there is no fixed burden on the company. Each share carries one vote.
  • Preference shares :- dividend is payable on these shares at a fixed rate and is payable only if there are profits. Hence, there is no compulsory burden on the company's finances. Such shares do not give voting rights.
    • Issue of Debentures- Companies generally have powers to borrow and raise loans by issuing debentures. The rate of interest payable on debentures is fixed at the time of issue and is recovered by a charge on the property or assets of the company, which provide the necessary security for payment. The company is liable to pay interest even if there are no profits. Debentures are mostly issued to finance the long-term requirements of business and do not carry any voting rights.
    • Public Deposits- Companies often raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company. The Companies Act permits such deposits to be received for a period up to 3 years at a time. Companies to meet their medium-term as well as short-term financial needs can raise public deposits. The increasing popularity of public deposits is due to :-
  • The rate of interest the companies have to pay on them is lower than the interest on bank loans.
  • These are easier methods of mobilising funds than banks, especially during periods of credit squeeze.
  • They are unsecured.
  • Unlike commercial banks, the company does not need to satisfy credit-worthiness for securing loans.
    • Also you can try your luck in angel investing. Angel investors are high net worth individuals , who invest in a start-up in return for a minority share in the business. They are usually serial entrepreneurs or heads of major multinational firms. They can also be a group of individuals who pool in funds to invest. The key networks include Mumbai Angels, Indian Angel Network, Hyderabad Angels, Pune Tech Angels, Business Angel Network of Kerala and East Angels. Angels typically come into the picture at a start-up's seed stage, when the business idea is just a concept. The business plan itself is very iffy. So what draws an angel's attention? Business ideas that have the potential to generate solid returns, as well as the person behind it, but they are basically in it for altruistic reasons. Since all start-ups are risky propositions at this stage, angels typically don't put in a huge sum. They invest in start-ups that are unlikely to draw the interest of venture capitalists since the size of investment is rather small, from 50 lakh to 5 crore, depending on the angel approached and the business idea.

     

    Agree Comment 0 Agrees over 3 years ago

    Advice you to prepare project report of the said business and on that basis you will get financial help from govt under make in india

    Agree Comment 0 Agrees over 3 years ago

    To raise money for your business, you have a number of options. Seeing your limitations and goals you can go for any of them.

    • Venture capitals are professionally managed funds who invest in companies that have huge potential. The investment is basically made when there is an IPO or an acquisition. 

    A VC investment may be suitable for small businesses, which are beyond the startup phase and already generating revenues.

    However, VCs have a short leash when it comes to company loyalty and often look to recover their investment within a 3-5 year time window. It is not fir for ventures/ businesses that will take time to give returns.

    • Early stage businesses can consider Incubator and Accelerator programs as a funding option. These programs are found in every metropolitan and major cities to assist hundreds of startup businesses every year.

    These programs normally run for 4-8 months and require time commitment from the business owners. You will also get an great opportunity to make great connections with mentors, investors and other fellow startups using this platform.

    • Normally, banks are the first place that entrepreneurs go when thinking about funding.

    Funding from bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned. Banks like Bank Of Baroda, HDFC, ICICI and Axis banks have more than 7-8 different options to offer collateral free business loans.

    • The Government of India has launched 10,000 Crore Startup Fund in Union budget 2014-15 to improve startup ecosystem in India. In order to boost innovative product companies, Government has launched ‘Bank Of Ideas and Innovations’ program along with ‘Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA).

    You are supposed to submit your business plan and once approved, the loan gets sanctioned. You get a MUDRA Card, which is like a credit card, which you can use to purchase raw materials, other expenses etc.

    Shishu, Kishor and Tarun are three categories of loans available under the promising scheme. SIDBI – Small Industries Development Bank Of India also offer business loans to MSME sector

    • Issue of Shares- It is the most popular mode. The liability of shareholders is limited to the face value of shares, and they are also easily transferable. A private company cannot invite the general public to subscribe for its share capital and its shares are also not freely transferable. But for public limited companies there are no such restrictions. There are two types of shares :-
  • Equity shares :- the rate of dividend on these shares depends on the profits available and the discretion of directors. Hence, there is no fixed burden on the company. Each share carries one vote.
  • Preference shares :- dividend is payable on these shares at a fixed rate and is payable only if there are profits. Hence, there is no compulsory burden on the company's finances. Such shares do not give voting rights.[1]
    • Issue of Debentures- Companies generally has powers to borrow and raise loans by issuing debentures. The rate of interest payable on debentures is fixed at the time of issue and is recovered by a charge on the property or assets of the company, which provide the necessary security for payment. The company is liable to pay interest even if there are no profits.
    • Public Deposits- Companies often raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company. The Companies Act permits such deposits to be received for a period up to 3 years at a time. Companies to meet their medium-term as well as short-term financial needs can raise public deposits. The increasing popularity of public deposits is due to :-
  • The rate of interest the companies have to pay on them is lower than the interest on bank loans.
  • These are easier methods of mobilising funds than banks, especially during periods of credit squeeze.
  • They are unsecured.
  • Unlike commercial banks, the company does not need to satisfy credit-worthiness for securing loans.
    • Another option is Angel investors. They are high net worth individuals , who invest in a start-up in return for a minority share in the business. They are usually serial entrepreneurs or heads of major multinational firms. Some of The key networks are Mumbai Angels, Business Angel Network of Kerala Indian Angel Network, Hyderabad Angels, Pune Tech Angels, and East Angels.

    Angels typically come into the picture at a start-up's seed stage, when the business idea is just a concept. Since all start-ups are risky propositions at this stage, angels typically don't put in a huge sum. They invest in start-ups that are unlikely to draw the interest of venture capitalists. The investment range is from 50 lakh to 5 crore.

     

     

    [1]

    Business.gov.in, Business knowledge resource online; Methods of Raising Capital

    http://www.archive.india.gov.in/business/starting_business/methods_raisingcapital.php

    Agree Comment 0 Agrees over 3 years ago

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