What are the major models of financing for a startup business?

 Generally for most of the startup businesses, financing a major issues. Since start ups are generally laid by the entrepreneurs who are new in the field of business and thus most of the time, they run of capital and fund.

And, for establishing a successful start up, there is always need for a big amount of capital. As most of the entrepreneurs are not having sufficient capital, they requires to raise capital for their dream start up.  

Here in this guide, we are listing some of the major model of financing for start up businesses. These are:

  1. Bootstrapping
  2. Angel investor
  3. Vendor Capital funds

 

  1. Boot strapping

Boot strapping is the method where the entrepreneur manages or attempts to raise the fund required for the establishment of their start up by their own. In this method, the individual manages to build and establish their company using their personal finances or with the help of the operating revenue of the company.

The common mistake that most of the entrepreneur does is making unnecessary expenses in marketing, equipments, and offices which they actually do not afford. This is basically a wastage of the capital in the inception of the business which finally lead to wasteful and complacency expenditure.

By using the personal finance or saving for the establishment of the start up business will help the entrepreneur for the cautious approach. This method of boot strapping will curb the wasteful expenditure and will help in enabling the promoter to be on their own toes all the time.

Bootstrapping is further divided into following categories:

  1. Trade credit
  2. Factoring
  3. Leasing
  4. Trade credit

This is the method where the entrepreneur gets their first order/ raw material on credit in order to launch their venture. In general, most of the suppliers are reluctant to give trade credit to the start up businesses.

In this case, either the entrepreneur itself or the chief finance officer should pay direct visit to the office of the supplier. There they should explain their financial plan to the suppliers and convince them to give their first order on credit so that they can launch their start up venture.

In this system, the owner or the finance officer can also consider taking half of the first order on credit and the balance on delivery. The key in this method is to get the goods shipped and sell before paying for the raw material.

Another approach is to borrow for paying for the raw material, but it will include the interest cost as well. This is why the trade credit is one of the best approach for reducing the amount of requirement of the working capital. This approach is specially better for the retail operations.

  1. Factoring

Another bootstrapping financing model is Factoring where accounts receivable of the businesses organization is sold to a commercial finance company for raising the capital of the company. In general, factoring is perform on non notification basis where the customers are not notified that their account have been sold.

This method is having both of their merits as well as demerits. In the process of factoring, there will be reduction in the cost for the business operations, and it will also help in reducing the cost associated with the maintenance of the account receivable like book keeping, credit verification, and collections. When we compare the cost and payable to the factor, in most of the cases, this method proved to be fruitful.

This method also helps in reducing the internal cost of the company as it frees up the cost required to tied the receivables. It is great method for raising money and for keeping cash flow.  

  1. Leasing

It is another method to take the equipment on lease instead of actually buying it. This will help in reducing the purchase cost and thus the capital requirement and will also help the lessee to claim for the tax exemption.

This is a great idea to lease equipments like Van, or bus, orany photo copy machine or any other equipment instead of buying it which is often much expensive for the start up businesses.

  1. Angel Investor

  Angel investors are those who invest in the start up ideas of the entrepreneurs. In general, most of the time the angel investors are either somebody from the family or the close friend. But there are many investors also who might show interest in investing in new start up business with good and profitable looking business plan.

The angel investors are those who focuses on helping the entrepreneurs to take their first step instead of looking for the possible profit that they might get from the business. They are much different from the venture capitalist.

They are kind of informal investors, seed investors, business angels, or the private investors who inject capital for the start up businesses in exchange of the ownership equity or convertible debt.

There are some angel investors also who invest via the crowd funding platform and build a network of the angel investor to pool in capital. These investors are basically those who use their own personal saving unlike the venture capitalists who pool money from many other investors and place them in a strategically managed fund!

  1. Venture capital fund

These are basically the type of funds which are made available for the small businesses as well as the start up firms with exceptional growth potential. These are basically the money which are provided by the professionals who along side management invest in young and rapidly growing companies which are having the potential to develop in a significant economic contributors.

The bottom line

So these are some of the best financing model for the start up businesses!