What are the methods available for raising money for your business?



What are the methods available for raising money for your business? 

 The universal question for any person who is starting off their business for the first time is "where do I raise the money for the business?" because money literally does not grow on trees. Well to give you a clear and true perspective listed below are the popular ways that are used by entrepreneurs around the world for building the foundation of their business.

 Bootstrapping: Bootstrapping is when you use the existing resources you have in your control for conducting the business setup and operations. A common source would be raising money from your friends and family. Usually, friends and family can be part of your mission and also offer you money for a lower return because anyways a business loan will have high-interest rates due to the risk factor of a business entity.

Some people have very high risk-taking ability and are ready to go all-in by using all of their retirement savings and some even go to the extent of selling their homes. However, selling your house is a very risky venture and you should try to not involve your primary real estate as you can never be sure of how the market dynamics change.

 Credit Cards: Raising money for young businesses is very dicey and therefore the young entrepreneurs end up maxing out all of their credit cards to manage the day to day execution costs of the business. 

 Venture Capitalists: Now, when you have a proof of concept for your business idea and can illustrate the same in front of others, businesses tend to reach out to venture capitalists.

 Big Insurance companies and large pension funds give their money to these venture capitalists who invest the money into young businesses that have huge growth prospects in the coming future. One needs to be very careful while negotiating the percentage of the company to be shelled out to these venture capitalists, because they usually end up getting a huge slice of the business and that eventually hurts the earning potential of the entrepreneur.

Angel Investors: There are angel investors i.e. high net worth individuals like the Bansal brothers (Flipkart) who have surplus cash with them and are ready to invest in upcoming startups. They usually demand a high stake in the business but they shell out less money when compared to venture capitalists. Some angel investors also work in a network and they invest together in a scalable and good business idea with high prospect.

 Bank Loans: Bank loans are yet another option for raising money. Bank loans are really good for those who have good cash inflows, however, it can be detrimental for companies with very little cash inflow as they might not be able to meet the interest costs and fall into the vicious debt trap. A lot of companies have closed just for the same reason. If the income that is generated from the borrowed money exceeds the borrowing cost i.e. the interest, then the owners will benefit from the situation. However, the same interest can reduce the benefit for the owners in the vice versa situation.

Microfinance providers or NBFC's: Another option for raising money is non-banking finance companies like Shriram Transport and Bandhan. The interest charged by these entities is usually on the higher side. This is used by companies that don't have access to the traditional financial services of the bank for several reasons.

 Crowdfunding: Crowdfunding is another option for entrepreneurs. Now, first of all, you need to know how crowdfunding works. In typical crowdfunding, an entrepreneur publishes his business idea or product he wishes to bring to reality on a website like Kickstarter.com. The entrepreneur states the way the product helps, how he is going to execute the business, how much money is required and how the money will be utilized and what his vision i,e, in which direction does he want to take his business to. All the people who want to support the business idea are allowed to donate or pre-order for the product. These people do not get any ownership of the business but get a token of appreciation by getting early access to the product after release. When the designated money is gathered the company starts using it for bringing the product in the real world. It also helps to deal with reality i.e. whether the world really needs the product or not.

 IPO: There is a time when the company becomes so big that it can't manage to raise enough debt for its highly demanding business operations. I wish every entrepreneur gets to this stage. This is the stage when the entrepreneurs go for an initial public offering(IPO). In IPO, the entrepreneur decides to sell the shares of its company to institutional investors and also retails investors. IPO is a very long and tedious process but when the entrepreneur doesn't want to incur the high costs of debt, an IPO will be the escape root. This is where investment bankers come into the picture who help in the process of a successful IPO.

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 Thanks for reading!
Please comment on any financial query you had like me to address. I will try to post something worthwhile. 

Coming up Next: What is an IPO and what role do investment bankers play in the IPO process?

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