Business Ideas: Money plays a crucial role in the success of any business. The more a business wants to expand, the more money it will require. This holds true for startups as well. Any startup requires funds to get started, and even if it has already begun, it will still need funds to expand. Many great ideas fail simply because they cannot secure funding. However, there are now many people who invest their money in good ideas to help startups enter the market and earn a good amount of money.
This is how you can easily raise funding to start a startup and learn tips from experts.
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However, before they invest, they want answers to some specific questions about the startup or business. If they are satisfied with the answers, they invest the money. Rajesh Bharti is sharing information about where to arrange funds for starting or expanding a startup or business by consulting experts.
First, understand the meanings of these specific words related to startups and business because any investor could use these words while asking you questions:
9 best tips to Raise Funding for Startups
Whenever someone wants to invest in a company or startup, they ask the question, “What is the valuation of the business or startup?” So before raise funding for startups it is important to know the valuation of any company refers to its total worth. It can also be understood as the process of estimating how much the entire business will sell for. To determine the correct valuation of a company, its revenue, profits, debts, EBITDA, EPS, PE (Price to Earnings) ratio, etc., must be considered. We will learn more about these terms later.
The meaning of equity is ownership. In any company, the value or valuation represents the total worth, and your ownership in it is referred to as equity. Similarly, if you are the sole owner of the entire business and have no debts, then your equity or ownership will be 100%.
Assume you want to start a food-related startup or business. The total cost of starting it is Rs. 1,000,000. You have Rs. 800,000 and have taken a loan of Rs. 200,000 from the bank. In this case, your equity in the business will be 80% (80% of Rs. 1,000,000), and the remaining 20% equity will be owned by the bank because they have provided you with a loan. This will be your liability, which includes any type of debt.
Any company that earns money by selling goods or services is called revenue or turnover. Many times, people mistakenly understand a company’s profit as revenue, which is incorrect. If the cost incurred in producing a product is more than the revenue generated, then the company will be in loss. For example, suppose a company sold 1000 products in a month, and the price of each product was Rs. 200. In this case, the company’s monthly revenue would be Rs. 2 lakhs (1000 x 200).
Profit & Net profit
In any company, profit is what it earns as income. Profit can be of two types: Gross profit and net profit. The amount left over after deducting the total cost of business from the revenue of any company is called gross profit. However, if we subtract taxes, interest (if any loan is taken), etc. from it, then the remaining amount will be the net profit, which is the actual profit.
Let’s say a company had a revenue of 10 lakh rupees in a month. The company’s expenses were 7 lakh rupees, so the gross profit of the company was 3 lakh rupees. However, after deducting taxes, interest, and other expenses of 1 lakh rupees, the company was left with 2 lakh rupees. This is the net profit of the company.
EBITDA is used to compare a company’s profitability. Its full form is Earning Before Interest Taxes Depreciation & Amortisation. Some companies may have very good profits, but due to debt, depreciation, and amortization, their net profit or pure profit is greatly reduced. EBITDA is more commonly used in manufacturing companies because they have plants. The cost of the machine in the plant decreases day by day, and its service has to be continuously maintained. Therefore, the Depreciation and Amortization values are calculated here. The formula for calculating EBITDA is:
EBITDA = Earnings + Interest + Taxes + Depreciation + Amortization
Let’s assume that a company’s net profit is 100 rupees. Before that, it paid 20 rupees in interest, 10 in tax, and had expenses of 50 rupees for Depreciation and Amortization. The company’s EBITDA would be 180 (100+20+10+50) rupees in this case.
When should funding be taken?
Experts suggest that startups should only seek funding when there is a great need for it. It would be better to start with self-funding, no matter how small the beginning is, rather than relying on borrowed money. However, some people may have a different opinion on this matter. Before seeking funding for a startup, keep these things in mind:
- Before taking any kind of funding, make a plan for how much funding is needed and how long it needs to be repaid.
- After making a plan for funding, make a plan for who to approach for funding. Do you want to take funds from an investor or get a loan from a bank?
- Before taking funding, it is also important to plan how this amount will be utilized. Experts suggest that the amount obtained through funding should be invested in the development of the startup.
- Do not blindly accept an investor’s terms. The terms can be negotiated. Try to ensure that even after taking funds from the investor, you retain control of the startup in your own hands.
Who gives funding
There are many sources of funding for startups. Some are as follows:
- friend or family member
- angel investor
- Incubators and Accelerators
- peer-to-peer lending
- venture capital
- grant funding
(We will know about all these in detail next week)
The ‘interest’ has to be paid to raise funds!
It is not the case that any investor or bank will fund a startup or business just like that. They can impose some conditions in exchange for funding. These conditions are as follows:
When an investor funds a startup, they always take a stake in the company, meaning they become a part-owner of the company. As a result, they have a say in the decisions made by the company. The more the startup benefits, the more the investor benefits according to their shareholding. If the startup incurs losses, the investor can impose their own terms to continue funding the startup.
Investors or banks also fund startups by giving them loans. In exchange, they charge a fixed interest rate every year. This funding is for a specific period of time, just like a loan. If it’s a private investor, they can charge an interest rate higher than the bank’s rate. Even if the startup incurs losses in the future, the interest will continue to accrue. Despite taking this type of funding, the founder or co-founder of the startup retains full control over the business.
How many types of funding
There are several types of funding available for starting a startup. The type of funding depends on the size of the startup and how old it is. Some types of funding are:
This is the earliest stage of a startup. At this stage, the founder only has an idea. There is a need for money to turn that idea into a business, although there is nothing to prove the business concept. To arrange this amount, they approach people or banks to raise funds. This fund can be in the form of an investment or a loan. This fund is called pre-seed funding. However, no investor or bank invests at this stage because the business plan is only in the air.
This is the stage of the startup where the plan has been made and it has already started to take shape. To establish its growth and presence in the market, the startup needs funding. For this, the startup’s founder or co-founders approach investors or banks that can provide them with funds or loans. At this stage, investors or banks are typically willing to provide funds or loans after studying the startup.
This is the stage of any startup when it begins to generate some revenue. If the startup is associated with a product, then it requires funds for improvements, marketing, team building, and other things. At this stage, many investors or banks become prepared to invest money. After this, if there is a need for funds, there are several stages involved. These stages include expansion and scaling of the startup.
Arrange funds for a startup from here
Funds can be arranged in many ways to start any startup or business. Learn about some of the ways:
Bootstrapping is starting a startup without taking help from any investor by investing one’s own money. However, many times parents or relatives help, who don’t expect the money back. Bootstrapping is a good option for a startup in its pre-seed stage. Both advantages and disadvantages are associated with it.
- You are the owner of the company and you have complete control over the company. You can work on your own terms.
- You can do many experiments in business. If an experiment fails, then there is nothing to worry about.
- If the startup fails for any reason, then there is no worry that someone will have to return the money.
- When your startup becomes successful without the help of any investor, it feels like getting a prize in itself.
- There is no worry that the focus on business will be only and only on earning money. Many times in the beginning the focus on the company is also to establish it.
- Investing your savings in a startup is also risky. If the startup is not successful, then the accumulated capital gets drowned and then you can get stuck in debt.
- Sometimes all the accumulated capital is spent in starting the startup itself. If the startup wants to expand, it cannot be done due to lack of funds.
- Startups have limited opportunities for expansion. Startups sometimes don’t reach their full potential.
- Startup expenses are limited. Sometimes even for small needs, money has to be spent thoughtfully.
- Resources become limited and startup founders have to put in a lot of effort on their own and take on additional roles.
Taking a loan from the bank
Startups can also be launched by taking a loan from a bank. Banks provide loans for both startups and businesses. There are various schemes available for this. Some of these schemes are as follows:
- There are three types of loans offered under this scheme:
- The first one is the Shishu loan. Under this, any person can take a loan of up to Rs 50,000 to start his business.
- The second is the Kishore loan. Under this, a loan of up to Rs 5 lakh can be taken. This loan is available to those who want to expand their existing business.
- Third is Tarun Lone. Under this, a loan of up to Rs 10 lakh can be taken. This loan is available to those whose business is completely established.
- The annual interest rate on the loan starts from around 8 percent. This loan can be availed for up to 7 years.
- The condition for taking this loan is that business-related papers such as business license or registration, business address proof, Aadhaar, PAN, etc. must be there. Complete information related to this loan can be obtained by visiting any bank branch.