Top 4 Ways to Fund Your Business Other Than Venture Capital

When start-ups try to acquire funds for their ideas, venture capital is seen as a suggested source of funds. Although a viable option for young businesses, it comes with drawbacks that can adversely impact businesses.

Why is venture capital not suitable for funding business?

Considering their structure, start-ups prefer equity financing as the main option to get finance. Venture capital is a preferred form of private equity that helps businesses develop at their nascent stages. Although venture capital brings large sums of money into the business, it also involves drawbacks which render it an unfavourable option.

• Reduction in owners’ stake: The primary problem of venture capital is that the investors will have a stake in the equity. If a large proportion of funds are sourced from venture capital, the owners might lose a majority share in equity.
• Loss of decision-making power: Sharing a stake in equity with investors also means sharing management and decision-making roles. This may lead to conflicts between the investors and the owners. 
• High expectations of investors: Owners of the company may be under pressure when funds are accepted from venture capitalists. Investors expect the business to grow big and earn huge returns in a short period. 
• Difficult to obtain: Venture capital can be hard to find, especially if one doesn’t have a network. Venture capital is also time-consuming since investors conduct analysis, forecasting and various assessments before providing funding.

Alternate methods to fund your business 

Given the drawbacks of venture capital, start-ups have other alternatives of raising funds apart from equity capital. As an alternative to venture capital, here are some of the best ways a start-up can raise funds: 

• Crowdfunding: Like the basic rationale behind mutual funds, crowdfunding involves more than one investor offering funds to the business. Funds are received from many investors based on the business plan and potential profitability. One can raise money through this method by listing their business plan and funding requirements on a crowdfunding website. People interested and believe in the plan make their investment in the business. The following types of crowdfunding are prevalent today:
  • Equity-based crowdfunding: Investors provide funding in exchange for equity.
  • Debt-based crowdfunding: Funding is provided in exchange for the return of capital with interest.
  • Reward-based crowdfunding: Funding given in exchange for certain tangible rewards in products produced or monetary rewards.
  • Donation-based crowdfunding: Funding is provided as a donation with no returns expected.

Crowdfunding is a faster way of raising capital without additional costs. It is a way of marketing one’s ideas to the public. One can also get feedback, opinions and expert guidance about the business plan.

• Business loans, advances and credit lines: Banks and NBFCs offer credit facilities explicitly catering to the capital requirements of entrepreneurs and start-ups. Bank loans can finance the purchase of fixed assets, working capital requirements and other business expenses. Banks also offer credit line facilities to businesses. Higher credit limits are offered, which can help businesses meet most of their expenses, along with special benefits such as points and perks. Thus, bank loans and credit lines are options commonly favoured by smaller businesses. 
• Revenue-based financing: Being a relatively new concept, revenue-based financing is a way of raising capital by pledging a part of their present and future returns. This method involves financers offering capital with a decided payback period. A flat fee is also charged on the revenue component. The manner of repayment is what sets this apart from other fund options. The capital, interest, and fees are paid from the company’s revenues during the business. This form of financing is beneficial for start-ups since they can obtain funds without pledging assets or diluting equity. Start-ups with potentially high revenue making capacity find this method ideal.
• Angel investment: Angel investing is a method of equity funding where individuals with surplus funds help finance small and start-up ventures. Unlike venture capitalists who get their monies from investment funds, Angel investors use their funds. They invest their funds at an early stage of a business. Angel investors screen networks and try to connect with start-ups with huge potential. With capital, they also bring in the knowledge and motivation for the business to succeed but do not involve themselves in the business. Although expectations and risks are high, angel investing has powered high profile businesses like Google, WhatsApp and Uber.

Although start-ups have generally preferred venture capital to fund their plans, its drawbacks have made entrepreneurs consider other funding options. With many alternatives available to start-ups, one must choose the option that is best suited to their business plans to ensure the longevity of their ideas.