How to go about a start up financing?

Venture Capitalist or Venture Capital firms are nowadays a good source of financing for start ups. While as said by some very good entrepreneur: "If idea is good it will attract finance automatically." But ideas such as banks, family, friends, relatives, etc are also good source of financing for start ups.

At the very early stages of any startup, entrepreneurs also tend to raise money from relatives, colleagues and other people they know well.

Usually, friends-and-family financing is informal. You probably won't have to write a business plan beforehand, for example. But no matter how well you know your early investors, you'd be wise to draw up a contract to prevent any misunderstandings down the line.

Finding the right financing that fits with a business' goals is a continuing challenge for almost every small business. For startup businesses this can be one of the biggest hurdles in getting off the ground.

Some entrepreneurs can be incredibly creative in finding ways to fund their ideas. Many work another job as a way to fund their personal business. Others finance their enterprises by going back to school. Business schools often can give you the tools and connections to get a business off the ground. Your classmates may be good business partners or the school may have a business plan competition with a prize of start-up funding for the busines.

Most companies, however, find their start-up funding in more conventional ways. The most common sources are:

• 72% Personal Savings

• 45% Banks

• 28% Friends/Relatives

• 10% Individual Investors

• 7% Government-guaranteed Loans

• 1% Venture Capital Firms

Using personal funds is very common, partly because few banks will loan to people who not risked some of their own personal funds. However, in the long run, most businesses will need external funding of some type.

The conventional wisdom in starting a business is that it is no one will loan money to a startup. With no history and no assets, one either needs to have savings, friends and family who are willing to help or an angel. While it is impossible to deny the challenges, loans do exist and with good preparation are even relatively easy to get.

Being prepared has to be first step in seeking external funding. Write a business plan, prepare financial statements, line up references, develop a clear definition of what the business enterprise is, get introductions, and look at how you rate on other factors such as your credit rating, financial history, and business planning that lenders consider in awarding loans.

Learn the lingo. It can be embarrassing to misuse terms. That immediately labels you as someone who has not done their homework - and consequently is not a good investment candidate. The Small Business Glossary lists a large number of terms you should know before talking with any person you may seek funding from.

Find out which are the right banks to approach if you want to go that route. The Small Business Administration has put together a list of commercial banks that scores the banks on how aggressive they are in small business lending. You can find which banks are business friendly in your area through their search mechanism.

One of the toughest questions is how much capital is enough. A quick model for cash needs suggests determining how much capital is needed for one year of operation. That first year, keep your initial capital separate from your income. That income should then be the initial capital for the second year. Amounts you will need to finance are that initial capital and any growth you want to introduce above and beyond the initial model. Many companies that are successful today have started that simply.

For most startups, getting a traditional bank loan is a long shot. That's because banks typically will only consider companies that have been in business for two years. What's more, they need to see a tangible asset that can be used as collateral. The exception is a manufacturing company building or using heavy equipment.

Rashmi

It is a nice topic you have touched.

If the idea is good and you have prepared a proper project finance report providing the details of the venture,management,competition and edge over others (why others would buy your product),feasiblity,projected cash flows and financial figures (with break even time),then Banks can finance you to the extent of 85% of the project.However 15%,you will have to sought from your own savings,relatives and friends.There are various project finance guys who can help you out in this if they are convinced about the idea and they take their fees.Also there are various seminars where you can interact with VC companies like Tie Shakti recently concluded in Bandra Mumbai.One can start small with own savings,get the business going then normally investors/ banks would be keen.