Question

The funding for most entrepreneurs or start ups often comesfrom personalsavings,debt,orventure

capitalists. Briefly explain each of these funding sources. Identifyoneadvantageandonelimitation forusing each to fund a startup.

Answer 1

Funding Sources:

1. Personal Savings: This is the most attractive source of funding, because we use our own money to start our business and don't depend on anyone else.

Advantages :

i) We have total control on our money and we can use it as per our requirement.
ii) This gives us a different feeling and satisfaction that we are using our own cash to raise our business.

Limitation:

i) The major drawback of this funding source is, if the business fails, all our savings will go waste.

2. Debts: We may take financial help from somebody, it may be our friends, relatives or any other whom we know very closely.

Advantages:

i) We can take money from our near and dear ones and start a business.
ii) This is easy to borrow money from our friends or relatives because they don't demand any documents for this.

Limitation:

i) Borrowing money means we have to repay it, but if our business fails then where will we get money to repay? This will be a major issue for us.

3. Bank Loans: We can take bank loans for establishing our business. Let's check its merits and demerits to know whether it is suitable for us or not.

Merits:

i) Banks provide different funding options based on our needs. If we qualify for the loan, then the funding process is relatively quick and easy.

Demerits:

i) It requires a lot of documentation which is time-consuming.
ii) We have to pay back the money whether the business succeeds or not, but if we fail to do so we have to loose all our assets or property that is mortgaged for loan.

4. Venture Capital: Venture capitalists are investors who invests a significant amount of money in exchange for equity in the business, and get returns when the company grows. Venture capitalists only invest when they are sure that this business will provide them good returns on their investment.

Advantages:

i) Venture capitalists provide funding as well as offer valuable advise and guidance to help raise the business.

Limitation:

i) We may loose a large part of our business while repaying venture capitalists in case of business failure.