How to Fund Your Startup? Should You Borrow or Fundraise?

Raise Funds for Your Startup

The most critical period for a startup is the initial years. To survive the initial years of operation, you need a sound funding strategy. You can use the USP of your product or service as an attractive deal. However, a proper borrowing or fundraising strategy is what will take your startup to the next level. Many startups fade out just because they lack funding or do not have a proper plan to raise funds for the business.


Effects of borrowing or fundraising in business

Perform a comparative analysis to identify how either funding alternative affects your products and services. Let’s look at the options available for both borrowing and fundraising, with a brief overview of their pros and cons.

Borrowing:

Bank loans

These are usually the first preference for startups. This is the most reliable option and comes with various long-term or customized facilities.

Loans under government schemes 

The Government of India is helping startups by initiating various loan schemes. Examples include the Pradhan Mantri Mudra Yojana [PMMY], Startup India, Make In India, etc.

Loans from Non-Banking Financing Companies [NBFCs] or Micro Finance Institutions [MFIs]

Microfinance Institutions and companies mainly help finance small businesses or startups. They are the best stop to buy loans where credit score or financial history does not carry much weightage.

Availing business credit card facility

Credit card facilities for business purposes are a new trend. Here, banks provide flexible payouts and can help you avoid a large debt. This can be particularly beneficial if your startup is small or requires a very minimal amount of funds.


Pros of Borrowing

Through borrowing, you acquire full ownership of the business. It is a very reliable source and turns out to be cost-effective for startups. You may also receive some tax benefits based on your selected mode of borrowing. Paying back your debts can also help in building a good business credit score.

The NBFCs or MFIs route requires fewer documents and involves quicker processing. Meanwhile, by availing government schemes, you may get several benefits based on the location of your startup and the products or services you offer.


Cons of Borrowing

Some bank loans require much more documentation and involve longer procedures which may disrupt your regular business functions. NBFCs or MFIs charge a higher rate of interest, which will not be beneficial for your business in the longer run. Many need collateral for security reasons. Loans may also restrict your cash flow and can affect your credit score.

Bootstrappi

Popularly known as self-funding (where you invest in your own business), it is the most effective and safest way to secure funds for your startup. It can be considered the first funding for a business, which may give various benefits at a later stage. 

Crowdfunding

Many startups are adopting this new trend of online fundraising. Here, the customers pledge to pre-order the products or services you offer. The business’s USP plays a great role in raising the fund. You can also directly connect with many authentic crowdfunding websites where you can avail of investments based on your share. 

Investors

Investors are the main fund givers who are attracted to investing in small businesses. As profit-seekers, they may provide the best offers to small businesses or startups. However, before seeking out an investor, it is necessary to understand the business products and services they usually invest in. This will help you analyze their area of interest before approaching them. If you approach an investor who is highly interested in products or services similar to yours, the product deal you sign with them may have an added value.


Pros of Fundraising

Fundraising helps you avail the fund much quicker than in the borrowing method, which may help to operate your business smoothly. An additional benefit of opting for investors is that it may help you expand your social circle. Through their connections, other investors may also get attracted, and the benefits only increase for you.

Crowdfunding can be beneficial as it helps in reducing the entry barrier. It helps to raise funds at any point of time in business. If you pitch your crowdfunding request attractively, your startup can gain media attention too.


Cons of Fundraising

The ownership of the business gets divided between you and the investors. There is a high risk of fraud in crowdfunding, as you may come across fraudulent or suspicious sites or people claiming that they will help the business in gathering the funds. Hence, it is vital to do some background research, which can be time-consuming and delay business operations. Furthermore, as profit makers, investors may take the greatest share of profit from the business.

To learn more about fundraising and borrowing, visit ketto.org for complete guidance and ways to accumulate the funds.


Conclusion

It is necessary to note that you should not opt for loans simply because they are reliable. Likewise, do not consider crowdfunding simply because it is trending. Knowing your business is the most vital aspect. Perform the necessary research and then plan for the funding you require. Pitching and developing the right business plan plays a significant role in attracting investors and funders. Additionally, the funding method you choose will always affect your cash flows, daily operations, and the product or services your startup is providing. Hence, both have their own risks and benefits.

If needed, you can also think about opting for the services of a financial advisor. They can suggest various fundraising alternatives that may suit your business model. They may also recommend investors that are beneficial for your startup and, in addition, help you find the right investor or right fundraising plan for your startup.


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