11 Different Types of Funding Sources for Startups


In simple words, Funding is everything that deals with Financial needs for your Business.

Every Entrepreneur who planned to Start a Business will require a sufficient amount of Fund to fuel their Business. There are many funding sources for startups, available according to the needs.

Starting from scratch it would seem to be hard to find the absolute method for your Business investment.

But after you know the need for funding your business, it would be possible to choose the right method of Funding for your Business.

Here in this article, we are going to see different types of funding sources for your startups to choose.

Self-Funding or Bootstrapping

Fund from your Pocket

Self- Funding in the type of fund that you invest for your Business from your personal savings.

In other words, it is called Bootstrapping.

This could be the best method to fund your Startup, especially for the first time Entrepreneurs.

It has more advantages, because of its accessibility.

Pros

You can use your personal savings, credit cards.

Instead of taking the burden of raising funds, you’re set free to focus on your business alone. 

You take the whole responsibility and it will help in managing the funds without wasting the single penny.

No one is going to influence or interfere your business.

Cons

Eventhough you don’t need any one to interfere in your business, you need some guidance and support for your business, which you’ll get from outside investors.

It may end up in financial risk when you invest more money from your savings in case of failure situation.

Fund from Friends and Family

Most of the business owners get funds from their friends and family, who really care for and believe in them.

This types of funding source for startups will be useful at the beginning stages.

It would be a better option for you to choose when compared to bank loans. Because of the flexibility in Interest rates and repayment to the person who has great concern on you and your growth.

Definitely it will not be a big amount to invest on your business but it would help in difficult situations.

Also you can get some suggestions and validate your business idea and get moral support from them.

Pros

The process is easy to get funds from them.

No need of any proof or documents as a security.

Cons

It will be viable to get at the initial stages only. They won’t assist you for long time.

Due to lack of knowledge and experience they may not support the business in growth prospects.

Seed Funding (Startup funding at Early Stage)

Seed Funding is the formal way to get fund for your business from the investors.

It is the early stage funding that any startup companies look for turning their idea into business. These funds are used to build some basic needs to start a company, which includes office spaces, equipments and infrastructures.

If your idea is recognised by any of the following investing instruments then they are most likely to invest in your company with an equity share.

Seed funding is followed by series funding which you’ll get at the different stages for the growth of the company.

Series Funding (Startup funding at Growth Stage)

As said above, the Series funding really works at the growth stages that are described in different rounds such as Series A,B,C,D.

The amount you get will be increased with subsequent funding rounds. These different rounds of funding will serve the variable purposes of an organization.

Series funding would be useful to expand the markets, new product development.

Showing the proof on growth and return on investments would be essential for founders who seek extra funds. Because, the investors measure the growth with several key performance indicators and metrics.

Let us try to explore some conventional sources to get funds for your startup company.

Bank Loans

Bank loans are the traditional way to get money directly from the Banks for any kind of business.

Most of the Founders look for Bank Loans as investment in the early stage financing.

Small Business loans from the small financial institutions and the government schemes are good way to start for the new entrepreneurs. As the debt would be available for nominal interest rates.

Pros

Small business loans are easy to get through schemes if the lender validate your startup idea.

It is easy to get additional loan for developments if you show the proof of good returns for your business.

The lender will not expect any equity share from you.

Cons

Besides your idea, the collateral documents should be submitted as a security to get loans from bank.

In case of any failure, irrespective of that, you will have to pay your debt continuously.

Startup companies should abide with many guidelines and compliances before applying for loan through schemes.

Another disadvantage is that it will take long time to get processed.

Crowdfunding As A Funding Sources For Startups

Crowdfunding is the type of funding, which involves a large number of people or groups to invest in your Startup Company.

As the name suggests, Crowdfunding uses a large number of individuals, Business groups, investors everywhere around the globe to invest in your new Business.

Though it is a non-traditional method of investment, it become popular among Entrepreneurs in recent years.

Approaching to these investors is easy, where you could find them through social media, online platforms, and separate Crowdfunding websites.

How does Crowdfunding Works?

Entrepreneurs prepare a detailed Business plan about their Startup which shows Vision and Mission statements, goals, Investment amount, and profit for their Business.

On seeing this plan, if the Investors like the idea of your Business they come forward to contribute to your business and get a share from the profit.

Also Crowdfunding platform act as a mediator and earn some commission from you.

Through Crowdfunding investment, you could gain the advantages of marketing your product and grow your Business as a Brand using Investors.

But before you choose Crowdfunding as your Startup capital you will need to check legal conditions and compliance that varies with different countries.

Angel Investors

Angel Investors are the individual person or a business group who have a large amount for investment for Startup Business.

They are also known as private investors and seed investors.

These Investors have a real interest in your business idea and support your Startup in the long term.

They guide you throughout the entire business process and act as a Mentor, directing you and your business on the right path to grow and achieve success.

Angel Investment is also called as equity financing where they expect equity position in your Company.

Angel Investors get a lot of Business proposals from Entrepreneurs seeking investment from them. After receiving many proposals Angel Investors scrutinize the right business idea to invest in the Startup.

The only disadvantage about Angel Investors is, they invest less amount when compared to Venture Capital Investment.

Venture Capital Investment

Startup Company or Small Business which has high growth potential get fund from big investment firm is called Venture Capital.

Venture Capital funds are managed by professionals that help companies at the early stages and also the companies that are well established, which seems to have exceptional growth potential in the future.

Startup companies could seek help for their investment from giant Venture Capital investors, investment banks, and other financial institutions.

There are different types of venture capital funding available according to the growth stages of the company.

The advantages of getting funds from Venture Capital investors are, the mentorship and guidance they provide for your Startup, as they were Business expertise that ensures sustainability for your company growth.

If you ask about the disadvantages, they would be engaged with your business until they get their invested capital amount along with the profits back.

Another disadvantage is that you could lose your authority and control to your Venture Capital investors, particularly in the decision-making process and in shaping the future of your company.

Startup Incubators

Startup Incubators are the organizations that act as a knowledge transfer system for young entrepreneurs, who aspire to grow a new company.

Despite not investing in your business, they guide, train, and mentor the founders in the specific domain of business. Thus it will help you gain good experience from the industry experts.

There are more Advantages to get help from such an Incubators.

You can attract some investors or entrepreneurs to invest in your ideas.

Developing important networks and contacts for your business would be possible to nurture your business from these programs.

Similarly, there are other likely mentorship programs available for startups, that includes investment and equity share as return is called, Startup accelerators.

Startup Accelerators

Accelerators offer a mentorship program to startups in their office for few months.

It is little bit different from incubators, because accelerators guide the founders and helps to get seed fund for the company.

After completing the entire course in few months, they help you to pitch your business to Angel investors or Venture Capitalists. But it is quite difficult to get screened for this program, as there is high competition.

Example: The best accelerator is Y Combinator.

Convertible Debt

Convertible debt is simply mean by short-term debt lend by the investors for the interest. Later it will be converted into an equity share in terms of percentage or ownership of your company.

This is popular for early stage startups, where the investors lend money after the seed round, and it is converted into equity in next round.

The main advantage of Convertible debt is, the investors valuate the business in later stage financing rounds.

Reader’s Insight

Let us know if we missed out on anything in this article different types of funding sources for startups and share your thoughts in the comment section.


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