Today, there are over 39K startups in India. With multi-billion dollar fundings from international investors and high-profile exits like the $16 Bn Walmart-Flipkart merger last year, the Indian startup ecosystem is creating unicorns at a rate twice as fast as it did previously. Meanwhile, the nation’s 577 Cr micro, small, and medium-sized businesses (MSME) sector is overcoming obstacles like starting up, finding investors for business and expanding their customer base. To solve the capital crunch problem for Indian startups, there are 5 easily accessible options for private funding for business :
1. Business loans for startups in India
Startups can be backed by banks and NBFCs through business loans. The loans are provided at reasonable interest rates, making it simple for startup owners to return the money. No matter the size of the business, funding is crucial, thus getting a loan to launch your venture is the best course of action.
However, there are certain things you should think about before applying for the loan. Without understanding all the details, applying for a startup loan for a new firm might be dangerous. In addition, as a business owner, you should have a strategy for how you will use the funds, what payback schedule would work best for you, and other factors. Being negligent with repayments might result in unpaid bills or even bankruptcy.
2. Asset Financing
Utilizing current assets as security to secure a loan is known as asset finance. The idea often entails pledging inventory and trade receivables in order to acquire a short-term loan meant to cover a company’s working capital requirements. Trade receivables are typically pledged as collateral for asset finance since they may be quickly converted into cash.
Lenders are less inclined to take inventory as security since it is a less liquid asset. Because they are not yet in a position to be eligible for longer-term finance that has a lower interest rate attached to it, SMEs and startups are the most frequent consumers of asset financing. One benefit of asset financing is that it may be utilised to secure additional funding for business start up relatively quickly.
3. Revenue Based Financing
Utilizing projected revenues to secure debt is Revenue-Based Financing. The percentage of the borrower’s income that must be pledged to the investor or lender is referred to as the “revenue share.”
This is a ground-breaking asset class that emerged in India during the epidemic as start-ups faced severe funding challenges. A hybrid financial instrument called revenue-based financing combines the finest aspects of equity- and debt-based financing solutions. It is a very promising finance option for expanding enterprises because of the flexibility of stock and the non-dilutive nature of debt. Indian players like Klub are funding some of India’s top brands as well as regional SMEs seeking flexible capital for business purposes.
4. Invoice Discounting
Businesses may instantly access cash held in outstanding invoices and discover the value of their sales ledger by using invoice discounting. It’s straightforward: when you send an invoice to a customer or client, the lender gives you a cut of the total, boosting your company’s cash flow.
Invoice discounting may also be seen as a succession of short-term company loans with invoices serving as collateral. In other words, the lender will advance the majority of the money before your client has actually paid you since they know that you are due it.
5. Venture Debt
Venture finance is a sort of financial funding used by startups and early-stage businesses. This kind of debt financing is frequently utilized in conjunction with equity financing. Banks that specialize in venture financing as well as non-bank lenders can offer venture loans.
As an alternative to equity financing tools like convertible debt or preferred stock, venture debt is widely employed. Using debt financing, as opposed to stock instruments, prohibits further dilution of the ownership interest of existing investment in a firm, including its workers. Contrary to traditional debt funding strategies (such as senior/secured lending), venture finance is not always backed by concrete, underlying collateral security.