There are generally two types of capital that are raised: Equity or debt. There are also some other ways in which entrepreneurs can use the existing infrastructure of the company to generate cash. Government incentives such as grants, and tax breaks should also be monitored. There are also entities that provide benefits that are as good as cash in lieu of equity.
Raising Equity
This refers to capital that participates (to the extent of shareholding) in the profits or losses. Equity in many times is looked at capital that is priced at least 15-20% returns per annum . Sources of equity include
1) Family and friends
Entrepreneurs raised capital from their personal networks. Generally, family and friends have been a source of startup capital for several entrepreneurs. One need not raise only equity from Family and Friends, but one can also take debt from them.
2) Entrepreneurs can raise capital from personal loans and then invest that capital into the company
Entrepreneurs can raise loans personally from their credit cards or by taking a personal loan from a bank. These monies can then be invested into the company. However, one should bear in mind that these loans usually have high interest rates.
3) Promoter financing
There are some lending firms who provide loans to business owners by taking the entrepreneurs’ share ownership and other personal assets as collateral. This source of capital is usually available to large companies. After getting this capital, the entrepreneur can invest this as equity into the company.
4) Raise equity in lieu of investment in kind
There are entities that provide capital indirectly by providing capital ‘in kind’ rather than in cash. For example, some incubators provide rental space in return for equity. There are newspapers and celebrities that provide ad inventory in lieu of equity. If a business is anyways going to incur such expenses, then exploring these avenues will be a worthwhile option.
5) Angel investors
Angel investors are individuals who make personal investments into early stage companies. They invest in lieu of equity ownership into the company. Most Angel Investors are seasoned executives who can also be good mentors for the entrepreneur.
6) Venture capital funds
Venture capital funds provide capital to early stage companies. Most VC funds focus on technology companies and not so much on traditional companies but there are a few that have a focus on the latter as well.
7) Private Equity funds
These funds invest in privately held companies. The companies that usually receive interest from these funds are larger and are not in the startup category.
8) Family offices
Family offices are institutions that mange the wealth of an HNI or a wealthy family. Different family offices have different focus areas. Some family offices are open to investing directly into companies either at a startup stage or at a mature stage.
9) Buyout funds
Buyout funds are like Private Equity funds who specialize on buying out privately held businesses. However, their focus is on complete buyout and they usually invest in larger companies and not those that are in startup stage.
10) Strategic investment
Strategic investment refers to raising capital from a competitor or from another company that operates in a similar industry. This type of financing usually brings the highest valuation. On the flip side, this outcome generally means that the entrepreneur has to exit either immediately or after 2-3 years and transition the company ownership to the buyer.
Debt
This refers to capital that asks for a fixed return independent of the profits of the business. Lower the interest rate, the more stringent the terms that come with it and more the collateral that is demanded.
11) Raising Venture Debt
Venture Debt is a loan for early stage companies. However, most of these loans are invested along with equity investment that comes from Venture Capital funds.
12) Raising a term loan
This type of loan is usually available only to capital intensive industries or to companies that can offer collateral to the lender. Loans from banks are the cheapest. Banks are the cheapest. NBFCs also provide such financing but they provide these loans at higher interest rates as compared to banks.
13) Raising working capital loan
This is one of easiest ways for entrepreneurs to raise capital. Working Capital finance is relatively easier to get. The most common type of working capital loans is receivables discounting. In this form of finance, outstanding receivables from well known customers are used as collateral and loans are provided by banks to companies. NBFCs also provide such financing but they provide these loans at higher interest rates as compared to banks.
14) Sale and leaseback
If your company is asset heavy, as in, it has assets such as an office space, machinery, then you can explore this financing channel. In this type of financing, a sale and leaseback company buys an asset from your company’s books and lends it back to you for a long-term rental contract. This structure frees up capital for you to use for your business without changing the operations as you can continue to use the asset even after getting it leased back.
15) Private debt funds and structured finance
Structured finance is a form of high cost debt. Usually it refers to a lender providing a loan that includes an equity component as well.
16) HNIs, Angel investors and Family Offices
As mentioned in the equity section mentioned above, these entities also provide debt financing. This is an expensive source of financing.
Other strategies
There are other ways in which an entrepreneur can raise funds. Some of them are mentioned below.
17) Franchising
For businesses that franchising opportunities, this is another strategy for a fund infusion. As an example, consider a chain of clinics that is looking to raise capital. The chain can consider selling a couple of clinics to a franchisee. The franchisee can purchase the 2 clinics and provide a franchising free as well to the chain in return for clinic management services. In this manner, the chain can keep its brand across all its existing clinics and also free up some cash.
18) Joint Ventures
The company can forge joint ventures with other like-minded entities for addressing some other markets. These Joint Ventures can be structured to have immediate cash flows for the company.
19) Selling some assets
If the company has more than one line of business, it can consider selling one of those lines of businesses. Alternatively, it can sell some assets. For example, the company can sell some machinery if it is unable to utilize its entire production capacity.
20) Lease assets
If a company has excess production capacity, it can also lease its equipment to other players in the industry.
21) Undertake services
In case a business has excess manpower, it can utilize them for new temporary lines of business with quick cash generation such as outsourced software development, consulting or trading goods.
22) Grants and tax breaks
Central, state and local governments provide several incentives for entrepreneurs. These incentives range from grants to tax breaks.
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