How To Find The Right Financing Option For Your Startup
Originally published on the Velocity blog. Read the original blog here.
Velocity is the largest revenue-based financing provider in India.
Almost all startups need extra capital at different stages in their business lifecycle. From paying vendors and doing marketing activities to growing your business and developing your product further, you need capital. And for that, various financing options are available today.
But the thing is, while all these solutions might seem similar at first glance when you dig deeper, there are vast differences in repayment cycles, terms, and conditions, provisions, etc. Therefore, it is essential to evaluate all options objectively before you make the decision. In this blog, we explain what are the different financing options available to you at different stages of your growth journey and tips on how to choose the right one. Read on!
Understanding Key Types of Financing Solutions: Debt vs Equity
Debt financing is when a financier provides you with the capital you need and over time, you repay that amount with the interest charged. The financier will consider a few factors such as your credit score, business credit score, and annual revenue to determine if you qualify for financing. However, unlike equity financing, the financier will not hold any stake in your business.
Types of Debt Financing Options
- Funds from friends and family — Most startup founders reach out to their friends and family in case they need immediate capital. Once the sales are done they repay the amount along with some interest. However, only a limited amount can be raised by friends or family.
- Loans — While often difficult to obtain, a loan is a lump sum amount of money you get that has to be returned in an agreed, set period of time. The bank offers short-term and long-term loans to businesses. A long-term loan can be paid back over several years. Here, the interest rates are quite high meaning more money out of your pocket.
- Credit cards — Many business owners also use their credit cards to cover short-term obligations and repay the charges at the end of the month at a small interest rate. Even though credit cards are an easy way to get quick money, it usually attracts high-interest rates, especially when you miss the monthly payments and can’t pay the minimum.
Types of Equity Financing Solutions
- Venture capitalists — VCs usually provide large funding amounts to startups to help them with their long-term obligations like — R&D, expansion into a new geography or a new product line launch, etc. In the long run, the venture capitalist may look to buy the company or, if it’s public, a substantial portion of its shares.
- Angel investors — Angel investors, like VCs, invest money in your startup in exchange for equity — a share in the company — or convertible debt for their money.
To know more, continue reading about how to choose the right financing for your business here
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