Money is the most important M of all the three M’s (Man, Machine, and Money) required to start off any business. The entrepreneur has many options at his disposal but selecting the right option is something that requires a lot of detailed analysis and a well-defined business plan. It also depends on the nature and size of the business he/she wishes to set up.
Owners Startup capital
It is always better than the prospective entrepreneur sets aside some savings of his own from the time he has decided to start off a new venture. This can be used as a seed capital to start off the initial set up. He would have to do a detailed market study and also devise an effective business plan with the help experts in this field. The business plan is a primary requirement for any business to raise capital, be it from banks or any other informal sources.
Seed Funding or Venture Capital
Venture Capital is a type of funding where the entrepreneur needs to convince the prospective investor/company to fund his/her idea. The success of this option completely depends on the how profitable the business idea is and the ability of the entrepreneur to convince the investor. The borrower would have to present a detailed synopsis of his business idea along with the cash flow projection for coming 5 years. The funding happens in installments according to the different stages of the business development.
This is the most common source of capital. The business would have to be registered as a partnership firm to be able to raise capital. Capital is usually sought from known people or family members with a promise of return on the capital by way of profit from the business idea. All partners would be entitled to a share in the profit based on their investment.
Bank Loans/ Debt Funding
Loans are the most popular and traditional sources of raising funds for the business. The entrepreneur would be required to submit the business plan and also some kind of collateral to avail this facility.
Equity mode of investment requires the entrepreneur to share the ownership of the business among the investors. The Equity shareholders are like the owners of the firm. These sources require a lot of legal formalities to be completed like registering the company, filings with the governing authorities. This would be suitable for firms that plan to expand their business.
All the sources come with different conditions attached with respect to return on capital but it all depends on how well the business idea is presented to the prospective lenders.