As a startup founder, one of the biggest challenges you’ll face is securing funding to turn your idea into a thriving business. Without sufficient capital, it’s virtually impossible to grow and scale your startup. That’s where financial modeling comes in. Financial modeling is the process of creating a detailed, quantitative representation of your business’s financial situation.
By developing a financial model, you can gain valuable insights into your startup’s financial health and use that information to attract investors, secure funding, and set your business on the path to success.
Financial Modeling for Startups
Financial modeling is a crucial tool for startups looking to secure funding. It involves creating a comprehensive financial plan that includes projected revenue, expenses, and cash flow.
By developing a financial model, you can assess the viability of your business idea and determine the amount of funding you need to get your startup off the ground. Financial modeling can help you identify potential risks and opportunities in your business, allowing you to make informed decisions about how to allocate your resources.
Benefits of Financial Modeling for Startups
The benefits of financial modelling are numerous. For starters, it allows you to create a clear and concise financial plan that you can use to communicate your business’s financial health to investors.
It also enables you to identify potential issues before they become major problems, giving you the opportunity to make adjustments and course-correct as needed.
Additionally, financial modeling can help you determine the optimal pricing strategy for your products or services, as well as assess the impact of different marketing and sales strategies on your bottom line.
Types of Financial Models
There are several types of financial models that startups can use to plan and manage their finances. One of the most common is the revenue model, which outlines how your startup generates revenue.
Another type of financial model is the expense model, which details your startup’s expenses. Cash flow models are also commonly used, as they show how cash flows in and out of your business over a given period of time.
Other types of financial models include balance sheet models, profit and loss (P&L) models, and sensitivity analysis models.
How Financial Modelling Helps in Raising Funds
By creating a detailed financial plan, you can demonstrate to investors that you have a solid understanding of your business’s financial health and future potential. Financial modelling can also help you determine the optimal amount of funding to ask for and the best way to structure your pitch to potential investors.
Additionally, it can help you identify potential areas of risk and come up with contingency plans to address them.
Steps to Creating a Financial Model for Your Startup
Creating a financial model can be a complex process, but it can also be highly rewarding. Here are the steps you should follow to create one for your startup:
While financial modeling can be highly effective, there are several common mistakes that startups should avoid. One of the most common is underestimating expenses or overestimating revenue. This can lead to unrealistic financial projections and ultimately hurt your chances of securing funding.
Additionally, startups should avoid relying too heavily on assumptions or failing to test their financial models thoroughly. It’s also important to be transparent with investors and provide them with accurate, up-to-date financial information.
Conclusion
Financial modeling is a powerful tool for startups looking to secure funding and set their businesses up for success. By creating a comprehensive financial plan, startups can gain valuable insights into their financial health and use that information to make informed decisions about how to allocate their resources. Whether you choose to create a financial model on your own or seek expert help, it is an essential part of any startup’s journey to success.
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Cash flow is the lifeline of any business, especially for startups that are still testing the waters. With the lack of cash flow management, established businesses as well as startups can face severe financial difficulties. This could lead to dwindled revenue as well as a complete shutdown of their business.
In this blog post, let’s break down the important cash flow elements for a thorough understanding.
What is Cash Flow?
Cash flow refers to the cash amount that flows in and out of an organization during a particular duration. Cash inflows include cash received from customers, interest earned, and any other sources of cash whereas Cash outflows refer to payments made to suppliers, salaries and wages, rent, taxes, and other expenses.
How Does it Work?
Cash flow works by tracking all the capital that flows in and out of a business over a specific period. This period can depend on a monthly or annual basis.
For firms to maintain a positive cash flow, they need to ensure that their cash inflows are greater than their cash outflows. The business will experience a negative cash flow if the cash inflows are less than the cash outflows. This could lead the business to severe financial difficulties.
Being an essential finance and accounting component, cash flow measures the net amount of cash and cash equivalents flowing into and out of a business. Positive cash indicates a growth in the company’s liquid assets. This allows the firm to settle debts and invest in growth opportunities.
Below are the key details of how cash flow works and its relevance to a startup:
Cash flow can be calculated using either the direct or indirect method.
The direct method calculates cash flow by tracking the actual inflows and outflows of cash, while the indirect method starts with net income and makes adjustments for non-cash transactions and changes in working capital.
The cash flow statement provides a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period.
The statement demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.
How To Analyze It?
To analyze cash flow, businesses must create a cash flow statement that outlines the inflows and outflows of cash over a specific period.
The cash flow statement helps businesses to identify their cash position and enables them to make informed decisions regarding their finances. Businesses can use various tools and software to analyze their cash flow and make data-driven decisions.
How to calculate cash flow?
1.) Calculate your revenue: Calculate your revenue by multiplying the number of services you provided by the price per service.
2.) Subtract direct costs: Subtract any direct costs associated with providing your services. This may include things like materials, equipment, or any other costs that are directly related to providing the service.
3.) Subtract overhead costs: Subtract your overhead costs, which are the costs that are not directly related to the provision of your services. This may include things like rent, utilities, and administrative expenses.
4.) Add back non-cash expenses: Add back any non-cash expenses, such as depreciation, that were subtracted in step 3.
5.) Subtract your taxes: Subtract your taxes from the result of the previous step.
Type of Cash Flow
Here are the three types of cash flows:
Operating Cash Flow (OCF)
Operating cash flow is the amount of cash generated by the core operations of the business. It includes revenue generated from the sale of goods and services, minus all operating expenses incurred during the same period.
Some examples of operating expenses include salaries and wages, rent, utility bills, inventory costs, and marketing expenses. This cash flow measure provides insight into the financial performance of a business’s core operations.
Investing Cash Flow (ICF)
Investing cash flow is the cash inflow and outflow related to the purchase and sale of long-term assets, such as property, plant, and equipment.
This measure includes the money spent on capital expenditures and the proceeds from selling long-term assets. For example, if a business purchases a new piece of machinery, this will be considered an outflow of cash. On the other hand, if a business sells a property, it will be considered an inflow of cash.
Financing Cash Flow (FCF)
Financing cash flow measures the inflow and outflow of cash related to the financing of the business. This includes money received or paid for issuing and retiring debt, issuing and buying back shares, and paying dividends.
Financing cash flow is important to track as it shows how a business is being funded and whether it’s relying on debt, equity, or dividends.
It’s important to note that while tracking each type of cash flow is crucial, it’s also important to understand the overall cash flow position of the business. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in the business, pay dividends to shareholders, or return capital to investors. Conversely, negative cash flow indicates that a company is spending more money than it’s generating, which can lead to financial difficulties and possible insolvency.
Managing a Startup Cash Flow
Managing startup cash flow is crucial for the success of any business. Startups can manage their cash flow by creating a cash flow budget, negotiating payment terms with suppliers, collecting receivables on time, and reducing unnecessary expenses. Startups need to stay on top of their cash flow to ensure that they have enough cash to cover their expenses and invest in growth opportunities and expand their business.
For startups, managing cash flow is critical as they often have finite financial resources. Startups must focus on creating a positive cash flow by increasing their cash inflows and reducing their cash outflows. They can do this by increasing their sales, reducing expenses, and managing their cash effectively.
Here are some tips for managing startup cash flow:
1.) Create a Cash Flow Forecast
A cash flow forecast is a prediction of your company’s future cash inflows and outflows. Use this forecast to plan your spending and make sure you have enough cash on hand to cover your expenses.
2.) Prioritize Your Expenses
Determine which expenses are essential and which can be delayed or reduced. Focus on the critical expenses that keep your business running, such as rent, salaries, and supplies.
3.) Delay Payments When Possible
Negotiate payment terms with your suppliers to extend payment deadlines. This can give you extra time to collect revenue from your customers.
4.) Collect Payments Quickly
Send invoices promptly and follow up on late payments. Consider offering discounts for early payment or charging late fees for overdue accounts.
5.) Manage Inventory Carefully
Keep a close eye on inventory levels to avoid overstocking or stockouts. Overstocking ties up cash, while stockouts can result in lost sales and missed opportunities.
6.) Explore Financing Options
Look into financing options like lines of credit, small business loans, or crowdfunding to help cover expenses during times of low cash flow.
7.) Focus on Revenue
Acquiring more customers to pay for the products/service is the best way to ensure they don’t run out of cash. And yet, many startups seek to attract new customers with free trials. That won’t generate revenue. A better approach is to charge customers a small fee to take part in a test and offer them a discount if they end up purchasing at the end of a trial period. They will be willing to pay if you have a good product.
8.) Monitor Regularly
Keep track of your cash flow on a regular basis and adjust your spending as necessary. Use accounting software or a spreadsheet to help you stay organized and on top of your finances.
Importance of Cash Flow for Startups
Cash flow is essential for startups as it helps them manage their finances effectively. Startups need to ensure that they have enough cash to cover their expenses and invest in growth opportunities. A positive cash flow can help startups secure funding and attract investors, while a negative cash flow can lead to financial difficulties and ultimately failure.
Here are some key points to explain why cash flow is essential for any business:
1. Helps Businesses Remain Solvent
Cash flow is a fundamental aspect of a business’s solvency. It is essential to ensure that a company has enough cash on hand to meet its financial obligations. Without sufficient cash flow, a business may not be able to pay its suppliers, employees, or lenders, leading to default, bankruptcy, and even closure.
2. Enables Better Decision-making
Cash flow statements provide a detailed breakdown of a company’s inflows and outflows of cash. By analyzing this data, business owners and managers can make more informed decisions about how to allocate resources and manage their finances effectively. A thorough understanding of a company’s cash flow can help business owners identify areas where they can reduce costs, increase revenue, or improve profitability.
3. Helps Secure Financing
Investors and lenders often look at a company’s cash flow statement when deciding whether to invest or lend money to the business. Positive cash flow indicates that a company is generating enough cash to cover its expenses, pay its debts, and potentially invest in growth opportunities. Investors and lenders are more likely to finance companies that have strong cash flow, as it demonstrates a company’s ability to manage its finances effectively.
4. Facilitates Planning
Cash flow projections are crucial for business planning. By forecasting future cash needs, businesses can prepare for potential shortfalls or opportunities to invest in growth. It can also help businesses manage seasonal fluctuations in revenue, anticipate changes in demand, and plan for unforeseen expenses.
5. Helps Manage Risk
Cash flow management is an essential risk management tool for businesses. By closely monitoring cash flow, businesses can identify potential financial risks and take corrective action to mitigate those risks before problems escalate. For example, if a business sees that its cash reserves are getting low, it may decide to delay purchasing new equipment until it has generated sufficient cash flow to cover the expense.
In a Nutshell
Managing cash flow is critical for the success of startups. Startups need to create a positive cash flow by managing their finances effectively, reducing expenses, and increasing their cash inflows. By analyzing their cash flow regularly, startups can make informed decisions and avoid financial difficulties. With the right strategies in place, startups as well as established businesses can achieve financial stability and grow their businesses in the long run.
FAQ
1.) What are the 3 types of Cash flow? The 3 types of cash flows are Operating, Investing, and Financing cash flows.
2.) What is free cash flow? Free cash flow is the cash a company generates from its operations, after accounting for capital expenditures needed to maintain and expand the business. Free Cash Flow measures the amount of cash a company has left over after it has paid for its operating expenses and investments in property, plant, and equipment. This money can be used for various purposes, such as paying dividends to shareholders, repaying debt, or reinvesting in the business.
3.) How are cash flow different than revenues? Revenue is the total amount of money a company earns from the sale of its products or services. Cash flow, on the other hand, is the amount of cash that flows in and out of a company over a specific period of time. They are is calculated by subtracting cash outflows (such as payments for expenses and investments) from cash inflows (such as payments from customers and investments).
4.) What are the important points of making cash flow for start-up businesses? The important points of making cash flow for start-up businesses include:
Wages and salaries
Payment to suppliers
Interests on loans and overdraft
Tax on profits
Repayment on loans
5.) What are the limitations of cash flow forecasting? The limitations of cash flow forecasting include:
Seed funding is a crucial stage of a startup’s development, providing the necessary capital to bring an idea to life. Seed funding is the initial investment that a startup receives to get off the ground and cover costs associated with development, marketing, and operations. However, securing seed funding requires entrepreneurs to understand the different fundraising stages, create a compelling pitch, and identify the right investors to approach.
In this blog, we’ll guide you through each stage of seed funding and also discuss its importance, the types of investors you can approach, the factors that investors consider when evaluating startups, how to get seed funding for your startup, and so on. Let’s get started then.
What Is Seed Funding?
Seed funding also known as seed money/seed capital/seed investment refers to the initial capital that a startup receives from investors or venture capitalists to launch and develop their business idea. This type of funding typically occurs during the early stages of a company’s growth, when the business model is still in development and the product/service is not yet fully functional.
Seed funding is usually used to cover the costs of product development, marketing, and operations, and can range from a few hundred thousand dollars to a few million dollars, depending on the needs of the startup.
How To Get Seed Funding?
Obtaining funds to launch a product/service is critical for many startups. To cover this risk, they start approaching external sources. Seed funding, also known as seed money/seed capital/seed investment, is the first key round of funding early-stage startups. Generally, the process may take 3-6 months. It may vary according to startup stages, intended to finance the initial stage operations of startups such as product development, market research, and technology development, contributing to a strong foundation for successful startups. All you need is a practical idea with a strong business plan and management team to convince investors that you have a product prototype or proof of concept for your business. Once the startup establishes a user base and persistent revenue, they can proceed to fund rounds – Series A, B, C, and D. But the founder must have an exact picture of when and how to raise seed funding effectively.
Different Series Of Funding
Series A:
Series A round is used to optimize its user base and product offerings. The venture capitalist is the most common source of funding for series A. The expected capital raised is between $2-$15 million.
How Series A funding works?
During a Series A funding round, the startup’s founders and existing investors will seek out venture capital firms or other institutional investors to provide additional funding. The investors will evaluate the startup’s growth metrics, business plan, and management team before making a decision to invest.
Series B:
In this stage, startups are ready for their development stage. They have substantial knowledge about their product/market and decide to expand to support the company’s growth to the next level. It can acquire up to $7 million to $10 million for funding.
How Series B funding works?
The funding provided in a Series B round is typically larger than that of a Series A, and the valuation of the company is usually higher as well ( between $30 million and $60 million). This allows the company to continue scaling its operations, expanding into new markets, and investing in research and development. The funding may also be used to acquire other companies, hire key executives, or strengthen the company’s balance sheet. Both Series A and B have some similarities in terms of the funding process and the investors involved, with the main difference being additional venture capital firms taking part in bigger investments.
Series C:
Series C funding occurs when a company has already achieved significant scale and is looking to continue growing rapidly. This funding helps to develop new products, expand into new markets or even acquire new companies. This stage sets a goal of raising $26 million on average.
How Series C funding works?
In a Series C funding round, institutional investors such as venture capital firms, private equity firms, hedge funds, and corporate investors are typically involved. These investors are looking for high-growth startups that have already established a significant market presence. Given the amount of capital required in a Series C funding round, investors often look for opportunities to deploy large amounts of capital into a single investment. This means that the investors involved in this funding round are often larger and more sophisticated than those involved in earlier rounds of funding.
Series D:
Most startups finish raising capital with series C. But when startups can’t achieve targeted goals, they may choose to raise Series D round. It is also known as a Down round.
Sources Of Seed Funding
1. Bootstrapping
Bootstrapping is a self-starting process where founders put their wealth or savings without external help. A small amount of money is set apart for the bootstrapping process at the time of starting a venture. Generally, founders may rely on internal cash flow and business revenue by substantially increasing their valuation or seeking funds from friends and family. It is an inexpensive form of funding because they need not want to return borrowed money from others. After all, it brings financial pressure on them to gain more profit. GoPro, Whole Foods, and Under Armour are some of the companies that have funded through bootstrapping.
2. Corporate seed funds
Another vital source of funding is Corporate seed funds. Big tech companies like Apple, Google, FedEx, and Intel regularly provide them with seed money if they think that startups can be a source of profit or talent for their pool. This funding can contribute to lucrative acquisitions in the future and also brings excellent visibility for startups.
3. Incubators
Business incubators are collaborative programs run mainly by private and public entities that provide all sorts of services ranging from management training, expert advice, office space, and venture capital financing to those at the idea stage. There is no need time limit to the duration of the services provided by Incubators. They invest a small amount of funding and usually don’t take equity from startups. Nevertheless, it helps to shape the business idea perfectly. The main difference between incubators and accelerators is that incubators focus on early-stage startups, whereas accelerators focus on scale-up startup growth.
4. Crowdfunding
Crowdfunding is the fastest way to raise a small amount of finance from a large number of people. The word “crowd” in crowdfunding refers to the individual investors or enterprises that provide finance using web-based platforms and social networking sites with no upfront fees. It provides funds needed to get a startup off the ground in return for a potential profit or reward. It would be an alternative finance option if you struggled to get bank loans or traditional funding. Equity crowdfunding, Debt crowdfunding, Donation-based crowdfunding, and Reward-based crowdfunding are some of the types of crowdfunding.
5. Accelerators
Accelerators (also known as seed accelerators) will be the startup’s first external finance in most cases. It’s a set timeframe program designed to provide sound advice, mentorship, and resources to support startup growth on a public pitch day or demo. A good startup accelerator scales up business growth for a certain percentage of equity. Y Combinator, TechStars, and Brandery are some of the well-known accelerators in India.
6. Angel investors
Angel investors (also known as seed investors, business angels, and angel funders) are high-net-worth individuals who provide capital in return for ownership equity or convertible debt. Apart from financing, it brings expert advice, stable growth, and a greater return rate. They often save startups at the risk of failing; that’s why they are called Angel investors and invest in small amounts and take more risks when compared to venture capitalists. They may conduct detailed research, competitive analysis, and several rounds of meetings before investing. Angel investors who earned at least $2,00,000 in income or a net worth of $1 million in assets are considered accredited investors by SEC(Securities and Exchange Commission). AngelList, Lead Angels, and Indian Angel Networks are some of the significant Angel networks in India.
7. Venture Capitalist
Venture Capitalist (VC) is the most common method of seed funding. VCs are institutions that finance a significant amount of capital from large companies or corporations. Beyond the budget, it offers services such as industry insights, mentorship, support, and connections. It’s not an easier task to pitch VCs as they tend to invest in startups that show brilliant business plans, strong presentations, and wide-ranging market and growth potential. They usually demand a high equity stake and participation in management decision-making. The average venture capital investment may range from $1 million to $100 million and involves narrow investment criteria.
8. Friends & Family
Friends and family are one of the common sources of seed funding for most early-stage startups. They are often willing to invest in the entrepreneur’s vision and can provide the initial capital needed to get the business off the ground. Seed funding from friends and relatives is typically less formal than traditional seed funding sources, and the terms of the investment can be more flexible. However, it is important to approach them with a solid business plan and clear expectations regarding the investment, in order to avoid potential conflicts down the line which could affect personal life.
State Government’s Seed Funding Schemes:
Kerala Govt implemented the Seed Support Scheme to provide monetary help to startups (having an upper limit of INR 15 lakhs ). It aimed to promote innovation-based enterprises’ creation and development, thereby encouraging growth in Kerala state through providing venture creations and increased job opportunities. Kerala Startup Mission enforced this scheme.
Govt of Karnataka provides seed funding under the “idea2PoC” program of the Karnataka Startup policy. It aims to provide seed funding to ideas or concepts which are yet to validate the proof of concept. It’s granted only one time, having an upper limit of INR 50 lakhs, and provided in installments over a maximum period of 2 years.
Govt of Haryana granted a seed fund of INR 3 lakhs for the authenticity of ideas, prototype development, traveling costs, and expenses for carrying out the initial activities of startups.
The Government of Bihar will give a seed grant of up to INR 10 lakh as an interest-free loan for furnishing authenticity of ideas, prototype development, assistance towards traveling costs, and almost all expenses required for setting up startups within ten years.
Seed Capital Fund Scheme turned an essential component of the Sher-e-Kashmir Employment and Welfare Programme for Youth (SKEWPY) into the Govt of Jammu and Kashmir (JK) initiative. It is a one-time grant that aims to provide seed funds up to INR 7.5 lakh to contribute to employment opportunities among youth and make business plans profitable.
Getting Seed Funding: Steps Involved
Step 1: Determine What Type of Funding You Need
Before seeking seed funding, it is important to determine the type of funding that is most appropriate for your startup. Seed funding can be in the form of equity, convertible notes, or simple agreements for future equity (SAFEs). Each type of funding has its own advantages and disadvantages, so it’s important to consider which option aligns best with your business goals and needs.
Step 2: Determine How Much to Raise
Once you have decided on the type of funding you need, the next step is to determine how much capital to raise. This will depend on the stage of your startup, your business goals, and your financial projections. You should create a detailed financial plan that outlines your expected expenses and revenue projections for the next few years.
Step 3: Create a Pitch Deck
A pitch deck is a visual presentation that outlines your business idea, market opportunity, financial projections, and team. It should be concise, engaging, and persuasive. A pitch deck typically includes slides that cover the following topics:
Problem: Define the problem your product or service is solving.
Solution: Describe your product or service and how it solves the problem.
Market: Define the size of the market opportunity and target customers.
Business model: Explain how your company plans to generate revenue.
Competition: Describe your competitors and how your product or service is unique.
Team: Introduce the key members of your team and their expertise.
Financial projections: Outline your revenue projections, expenses, and funding needs.
Step 4: Meet With Investors
Once you have a pitch deck, you can start meeting with potential investors. This can include angel investors, venture capitalists, and even family and friends. You can also attend networking events and pitch competitions to connect with investors.
When meeting with investors, it’s important to be prepared and professional. You should be able to answer questions about your business plan, financial projections, and team. It’s also important, to be honest, and transparent about any risks or challenges your business may face.
Step 5: Negotiate Terms
If an investor is interested in funding your startup, you will need to negotiate the terms of the investment. This can include the amount of funding, equity stake, and other key details. This is typically done through a term sheet, which outlines the main terms of the investment.
It’s important to seek legal advice when negotiating the terms of the investment to ensure that you fully understand the implications of the agreement.
Step 6: Finalize The Deal
Once the parties agree on the terms, the investor will provide the funding to the startup in exchange for an equity stake. At this point, the parties must sign legal documents to finalize the deal.
We Help You Raise Funds Effectively
Looking to raise funds for your startup? Our financial modeling service can help. We work with you to create a detailed financial model, identify sources of funding, develop a pitch deck, and provide ongoing support throughout the fundraising process. Our expertise and guidance can help you increase your chances of securing seed funding and kick-starting your business. Contact us to learn more about our services.
Seed Funding FAQ
1.) How much is seed funding? Seed funding round amount typically ranges from $500K to $2M. But this can vary depending on factors like location, industry, the track record of the startup founder, and more.
2.) What documents are needed for seed funding? The specific documents you would need to raise seed funding can vary depending on the investor and industry. But some common documents that you will need are the pitch deck, business plan, financial statements, and projections.
3.) What are the requirements for seed funding for startups? The requirements for seed funding can vary depending on the investor, but some general requirements include a business idea, an MVP, a capable team, and an idea of your target market.
4.) What comes after seed funding? After seed funding, startups typically move on to their next round of funding, which is Series A. This round is typically aimed at helping startups expand their operations and develop their products or services further.
5.) How is Seed Funding Different From Series A, B, and C? Seed funding is the initial stage of funding for a startup, while Series A, B, and C are subsequent rounds of institutional funding used to expand and scale the business. Funding amounts increase with each round, and investors become more involved in the company’s operations as it grows.
An investment bank is a financial service provider that serves as an intermediary in large and complex financial transactions. These banks provide financial services such as deals in stocks and bonds, mergers and acquisitions, pension fund management, financial sponsorship, and payment solutions for corporate. There are many international investment banks in India. They help businesses and Governments to raise funds through access of capital markets, such as stock and bond markets. An investment banker assist startups to prepares for its launch of an initial public offering (IPO) or when a company merges with competitors.
Benefits
Offers financial services and advisory to individuals, companies, and the Government.
Provide insights/knowledge about the risks and benefits of investing their money in other companies.
Matches sellers and investors in financial markets and economy, adding more liquidity to markets.
Undergoes thorough investigation of the deal/project to minimize the risk associated with the same.
Connect investors and companies to makes financial development more productive and promote business growth.
How do International Investment banks work?
International banks in India are often classified into 2 categories:- Buy side and sell side. Buy side of the investment bank aims to maximize returns while investing/trading securities like stocks and bonds. It generally includes with pension funds, mutual funds, hedge funds, and the investing public. On the other hand, sell side of the investment includes selling shares of newly issued IPOs, placing new bond issues, involving in market-making services, and support clients to facilitate transactions.
Based on services provides, Investment banks have three divisions including:-
Front office:- Front office is the most important department in an investment banks that creates maximum revenue in an investment banking firm. Some of the front office services consist of merchant banking, strategy formulation, professional investment management, and so on.
Middle office:- Middle office services include compliance with Government regulations and restrictions for clients such as banks, insurance companies, and finance divisions. These are the people who manages fundraising and internal control systems.
Back office:- Back office services are the part and parcel of investment bank. The services includes creating new trading algorithms, authenticating data of previous trades of investment bank regulates all operations and technology platform.
Types of Investment Banks
The following are the 4 types of Investment banks:
1.) Regional Boutique Investment Banks
Regional boutique investment banks are smaller investment banks and have small workforce. These banks specialize in providing a range of financial services to clients within a particular geographic region. They typically focus on serving mid-sized and smaller companies, rather than large corporations, and may have expertise in specific industries or sectors.
2.) Elite Boutique Investment Banks
Elite boutique investment banks specializes in providing high-end financial advisory services to clients. They are typically smaller in size and more specialized than larger investment banks, and often work with clients in specific industries or sectors.
3.) Full-service Investment Banks
Also called Bulge Bracket Investment banks, Full-service investment bank are the largest and most comprehensive investment banks that offers a full range of investment banking services.
4.) Middle Market Investment Banks
Middle market investment banks specialize in providing corporate finance and advisory services to companies with annual revenues ranging from $10 million to $1 billion. They mostly deal with mid-market firms, specifically for raising debt or equity capital, as well as mergers and acquisitions.
J P Morgan is the leading International investment bank operating in Mumbai since 1930. The firm began by offering commercial banking services and was later spread into other sectors. They offer financial services to clients in more than 100 countries to do business and manage their wealth. As an comprehensive product platform, client’s interest is their core principle.
Goldman Sachs is global investment bank founded in 1869. Its headquarter is in New York. The firm provides services such as investment banking, securities services, global banking, and markets. It serves India’s leading companies and has corporate customers throughout the country. They maintain offices around the world and in India, they have offices in Mumbai, Bangalore, and Hyderabad.
Morgan Stanley is an international investment bank that has branches in Mumbai and Bangalore. They provide best consultation, fundraising services, fund management, research, and investment banking services to Governments, corporations, institutions, and individuals around the world. The firm focus to maintain first class service and high standard of excellence for its clients over 85 years.
CGM India is a subsidiary of Citigroup Inc incorporated in 2000. It has a large team of experts with industry experience and a strong network providing services such as investment banking, securities trading, and market analysis. Further, CGM is the a member of both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) as well.
Bank of America is one of the leading International investment bank. This firm was formerly known as Bank of America Merrill Lynch. The firm was established in India since 1964, which has offices in Chennai, Mumbai, Bangalore, and New Delhi. Further, they offer fund raising, M & A advisory, securities research, trade facilities to its clients in India.
Deloitte is the world’s largest professional services network. It is a Big Four accounting firms with operations in over 150 countries and territories worldwide. In 1972, the firm was combined with with Haskins & Sells and merged with Touche Ross to form Deloitte & Touche and later was renamed Deloitte Touche Tohmatsu in 1993. The company offers audit, assurance, and risk advisory services to clients including multinational enterprises and major Japanese business entities.
Headquarters: London, England
India Office: Mumbai, Bangalore, Chennai, Hyderabad, Gurugram, Pune
Deutsche Bank is a global leader in investment banking. Its headquarter is in German with its operations in Europe, the Americas, and Asia. As of 2020, it was the world’s 21st largest bank by total assets and 63rd largest by market capitalization, providing various services to financial sector worldwide.
Credit Suisse is a global Investment bank and financial services company founded and based in Switzerland and is engaged in services like private equity, asset management, research etc.
Barclays is a British multinational Bank providing services like private banking, personal banking, corporate banking and investment banking. They currently operate across the globe.
Headquarters: London, UK
India Office: Mumbai, Bangalore, Delhi, Chennai, Kolkata
BNP Paribus is a french international banking group and is one of the 10 largest banks of the world. They help corporates and its clients in Investment Banking solutions and also offer other global financial services. BNP Paribus has presence over 65+ countries and territories on 5 continents.
Headquarters: Paris, France
India Office: Mumbai, Kolkata
Employees: 1,90,000
Conclusion
Investment banks are popular financial institutions that serve large organizations and companies to take important financial decisions and grow their business. Briefly, They are experts who undergo thorough investigation and understand the feasibility of large projects to assure that the company’s money goes into safe hands.
Investment Bank is a financial organizations that helps individuals, entities, or governments to raise capital and also provide financial consultancy services. They act as an intermediary between investors and companies. An investment banker assists startups in raising funds to start their business and helps to find investment chances. Apart from finding capital, it supports startups in preparing business plans and pitch decks and entering the gateway of the capital market. Hence, Let’s look at the top investment banks in India:
One of India’s central investment banks, Axis Capital Limited, is a leading equity firm. Firstly Axis Capital was founded in 2005 in Mumbai as Enam Securities Private Limited. Also, Axis Capital Ltd owns Axis Bank, the largest private sector bank. The bank offers solutions in conventional value and investment banking. It provides financial services to companies, investors, and government bodies in private equity, equity capital markets etc.
Avendus Capital is a leading financial service company that offers tailor-made solutions to asset management, wealth management and credit transactions.Similarly it offers investment banking too.founded in 1999 with its headquarters in Mumbai. The Avendus brings together ideas, innovation, and people to empower high-performing entrepreneurs, wealth creators, and leaders of the new-age economy to fulfil their dreams. The firm advises large global corporations on strategic matters and also about mergers and acquisitions transactions. The complete subsidiaries of Avendus capital include Avendus Capital Incorporation and Avendus Capital Private Limited, situated in New York and London, respectively.
Edelweiss Financial Service Limited was a part of Edelweiss Group, founded by Rashesh Shah and Venkat Ramaswami in 1995. India’s leading financial service companies, Edelweiss, provide a spectrum of financial services to a substantial client base, including corporations, institutions, and individuals. They also offer assistance, including credit facilities, franchise and advisory business (Asset Management, Wealth Management, and Capital markets), and Insurance (General and Life Insurance). Credit facilities comprise retail and corporate credit, SME and business loans, agriculture and rural finance, wholesale mortgages and distressed credit. Centrum India and SMC Finance are the main competitors of Edelweiss.
The JM Financial Institution Securities established from 1998 with its headquarters in Mumbai. They eventually provide all-in-one investment financial services comprising Investment banking, wealth management (fee and fund based activities), Asset management (mutual fund business), Mortgage lending (retail mortgage lending and wholesale mortgage lending), Distressed Credit (Asset reconstruction business). The company works with high net worth individuals, big corporations, and retail investors. They are notable for their private equity services in the business.
ICICI Securities Limited is a subsidiary of ICICI Bank Ltd. Firstly it began its operations in 1995 with its headquarters in Mumbai. Subsequently the firm conveys advisory services to corporations, financial institutions, and retail investors. Some of the company’s assistance comprises Investment banking, Institutional broking, Retail broking, Wealth management, placement of IPO. The company is the largest e-brokerage business in India. The company offers a spectrum of products and services in derivatives, equities, research, and advisory services, including equity portfolio advisory, financial planning, retirement planning, and estate planning.
IDBI Capital is known to be IDBI Capital Market Services Limited. It is a wholly-owned subsidiary of IDBI Bank, incorporated in 1993. It is an investment banking company that offers a perfect bundle of services and products, including capital market products, Fund management, Private equity, Underwriting as well as debt replacement . They aim to maintain integrity and transparency to guide their vision to have an International presence and work cohesively with passion and commitment towards the benefits of the customers they serve.
The 03 Capital, a mid-market investment bank formed in 1993, specialises in providing strategic and financial advice to the retail, institutional and corporate clients. The company focuses on corporate finance as well as alternate asset management as its core business. They provide unbiased and tailored solutions to different industrialists, healthcare, life science, and financial services too. Avendus Capital is the edge-to-edge competitor of O3 capital.
The Veda Corporate Advisors the largest Chennai-based investment banking firm, founded in 2003. The firm assists clients in mergers and acquisitions, buyouts, venture capital, joint venture, and private equity. It serves real estate, health care, media, infrastructure, and financial services. The company authorised and paid-up capital stands at 2,50,000 and 1,34,420, respectively.
Firstly Spark Capital is founded in 2001, with its headquarters located in Bangalore. It is one of the prime mid-market investment banks that connect with financial services encompassing Investment Banking, Fixed Income Advisory, Wealth Advisory, and Institutional Equities. Above all customer satisfaction is the core objective, thereby maintaining a sustainable and long-term relationship with clients. Sectors, where they built considerable transaction experience, are fintech, healthcare, commerce, infrastructure, and media. Spark Capital managed to be on the League table all time.
Unitus Capital was India’s first impact-based investment banking firm. It was established in 2008, with its headquarters in Bangalore. It provides services such as Private Equity, Corporate Advisory, Debt Finance, and Structured Product. They are dedicated to delivering top-tier capital raising and advising services to local and international investors to assist businesses while positively impacting society and the environment. Agriculture, education, healthcare, and financial inclusion are the most heavily serviced industries.
Mape Advisory Group, firstly formed in 2001, is a leading investment bank focused on Private Equity and Merger and Acquisition advisory starting from origination to closure. It has been consistently ranking top 10 investment in India. A team of senior investment bankers founds them to help their clients identify and execute effective transaction strategies. In addition, they work with India’s most leading industries across Telecom, Technology, Healthcare, financial services, Engineering.
Ambit is one of the premier independent investment banks formed in 2006. In particular it provides capital and financial advice to its clients, say, high net worth individuals, self employed individuals, corporates, company, Small and Medium Enterprises. The firm focused on furnishing customized solutions that are appropriate to their client’s needs. It is mainly of of 6 core business groups: Asset Management, Corporate Finance, Equity Capital Market, Institutional Equities and Research, Global Private Clients, and Non-Banking Finance Company.
Investment banks are the most calling sector as they focus on managing and increasing clients’ financial needs, helping them grow their business. A good investment banker knows the best ways to raise funds by adding more creative ideas to economic models. Moreover if you are looking for the best investors to fund your startups, Let’s get connected – Our team of professionals makes startup funding possible.
Services Offered :
There is a variety of services offered by investment banks in India. The top main services includes:
Buybacks and Takeovers: Investment bankers in India advise their clients tobuy back their shares at the right time. In addition they help them to do theirdue diligence, finding out the target company, and understand whether the takeovers are necessary. They also help the companies adhere to compliances and managements as per SEBI(Securities and Exchange Board of India).
Corporate Advisory: Investment bankers in India offer corporate advisory to various companies, especially to giant companies and corporate bodies. As corporate advisory is a huge area, they first understand the needs of the companies and then offer services. They start with business appraisals, and then the investment banks in India help the companies develop a business plan. Once the business plan is set, they go for strategic project advisory. Then they also help companies with business valuation, project identification, and corporate restructuring.
Mergers & Acquisition Advisory: Companies always focus to expand their market share and generate more revenue. Thus, they need to find a better opportunity tomerge with other companies or acquire any that can help them reach their objectives. Investment banks in India help these companies make the right deals and make wise decisions so that the Return on Investment(ROI) gets to a maximum and the risk becomes the least. It is the consolidation of companies and assets through various financial transactions.
Sales and trading: Within investment banking, sales, and trading groups are the agents for clients. They call institutional investors with opportunities. Traders execute orders and advise clients in case of the enter and exit financial positions.
Asset Management: Usually, investment banks in India offer management of public issues under two methods – the fixed price method andthe book building method. They also offer IPO (Initial Public Offering), FPO (Follow on Public Offer ), Preferential Issues, Rights Issues, QIP (Qualified Institutional Placement), and Debt Placement. The idea is to help big organizations expand in the long run and advise them on various strategies.
Debt Syndication: When a company is looking to finance new opportunities, they mostly don’t have enough cash to go for it. However, if they talk to investment bankers, they can help them with project finance, term loan, external commercial borrowing, etc. These services facilitate the public andprivate companies to tap into the right opportunities at the right time and ensure solid growth.
Types of investment banks
There are 4 types of investment banks as follows
1. Regional Boutique Investment Banks
These are the smallest banks. They also provide services concentrated in a specific region. They frequently get into agreements with tiny local companies. The regional boutique investment bank’s usual deal size is less than $10 million. As specified earlier they have a restricted geographic reach. They don’t require competencies like public problem management or mergers and acquisitions advising because they work with smaller companies. They usually assist businesses with loan financing. These banks have a small workforce.
2. Elite Boutique Investment Banks.
These banks offer a full range of services but also have specialization in some aspects. They don’t participate in every activity available at bulge bracket businesses. Some of these high-end boutiques will specialize in a single industry. For example, they provide services specializing in oil and gas M&A transactions.They work on deals that are around the same magnitude as those done by mid-market companies. In reality, the deal sizes can occasionally rival those of bulge-bracket corporations.
3. Full-service or Bulge Bracket Investment Banks
An investment bank that offers a full range of investment banking services. Buying and selling, M and A securities services, financial advisory, research, etc. Goldman Sachs, Morgan Stanley, and Credit Suisse are examples of such banks. These companies already have significant commercial interests in retail banking, mortgage lending, and other areas of consumer and corporate banking. This sets them apart in the market. The word “bulge bracket” has no universally accepted meaning. However, it is most commonly used to refer to well-known global investment banks in most regions of the world. Bulge brackets are pretty finicky about who they do business with. They are generally only involved in deals if the deal size is over $1 billion.
4. Middle Market Investment Banks
They are larger than regional boutique banks but not as large as bulk bracket banks. These banks either provide a wide range of services or focus on specific aspects. They may provide services in more than one state or region, but they are not multinational. The names of mid-market investment banks aren’t well-known. But frequently have extensive investment banking expertise and are well-known in the financial community. The range of services they provide is fairly comparable to what bulge bracket businesses do. They have a smaller geographic spread. Mid-market investment banks are frequently focused in one geographic period. It’s possible that they have many offices in the same nation or region. They do not, however, have a presence on the international level. Medium-sized businesses are the primary users of their services.
Savings is a good option when you want your money to be in one place and available anytime you need it in urgency. Also, savers tend to save their money in a low-risk bank account where they can maximize their money hence, they should opt for the highest annual percentage yield savings account available. Contrary to savings, Investments have a certain level of risk involved and are available in the form of mutual funds, stocks, etc. Investments involve a third person, referred to as a “broker” who guides you to buy or sell as per best fit.
The fundraising process demands documents to pitch investors. Scaalex specializes in building investor focussed Financial modelling, Valuation report, Business Plan and Due Diligence reports. Talk to our experts to learn more about the fundraising process.
F.A.Qs
Q1. What is the difference between savings and investment?
Investment means the money that you invest your savings in some plans for gaining profit. It can be long-term savings. Whereas savings means the amount left out of your salary after spending your monthly income.
Q2. Are there any tips for investing?
Actually yes.The main tips to keep in mind before investing are:
Make a plan before investing
Study the stock market before investing to reduce risk
Figure out the risk and amount of loss that you can bear and plan accordingly
Try different types of investment for diversity and not depend on one only
Investment should be done regularly and not all at once to avoid losing all of it
Q3. Why investment is important?
Investments give much more return than savings accounts or fixed deposits. You may get high or low returns depending on the scheme and conditions of the share market if it’s regarding stocks. Acts as an aid in achieving your dreams.
Lack of finance is the main limitation in the infrastructural sector in India. The Government recognises that infrastructure requires a significant investment that the public cannot finance alone. Therefore , in other words, it cannot be financially viable because of long capital investment requirements, long gestation period, and small revenue flows in the future. Most importantly, the Government decided to implement a new scheme named-“Viability Gap Funding” (VGF), formed in 2004, administered by the Ministry of Finance (Nirmala Seetharaman). In other words, It aims to complete the infrastructure projects successfully that are economically justified but fall short of financial unviable. On a year-to-year basis Plan Scheme had designed for this fund, and the budget is allocated.
However, earlier projects were limited to economic infrastructure. Later, In 2006, The Cabinet Committee on Economic Affairs, chaired by Prime Minister Sri Narendra Modi has approved for revamping or updating the VGF scheme as “the Scheme for Financial Support to Public-Private Participation (PPP),” extended over five years (till Financial Year 2024-2025). PPP refers to a project based on a contract between Government and a Statutory entity or private sector company for supporting infrastructure services. The new scheme encouraged both social and economic infrastructure projects. It aims to support projects that come under PPP and facilitate private sector investment in social infrastructure.
Further, the revamped scheme becomes operative within one month of Cabinet Approval, financed from budgetary support of the Ministry of Finance. A total outlay of 8,100 crores for investment was predicted, out of which 6,000 crores was set apart for PPP projects in the economic infrastructure division and the remaining 2,100 crores for social infrastructure projects. In short, the Viability Gap Funding scheme is a one-time or deferred grant to support infrastructure projects that comes under Public-Private Partnerships (PPP).
List of sectors under Viability Gap Funding Scheme:
Health and education development.
Roads, railways, seaports, airports, bridges etc
Oil and gas pipelines
Electricity
Irrigation
Soil testing laboratories
Terminal markets
Water supply, sewerage, and solid waste management
Telecommunication (Fixed Network)
Telecommunication towers
Infrastructure projects in Special Economic Zones(SEZ).
Capital investment in the creation of modern storage capacity(including cold chains and post-harvest storage)
Common infrastructure in agriculture markets
Objectives:
To attract and promote more PPP’s in social and economic infrastructure, thereby making essential projects viable.
To facilitate investment in social sectors such as education, health, water supply, wastewater, solid waste management.
Building new hospitals and schools generate more job opportunities, especially in remote areas.
The new scheme will be beneficial to the public as it helps develop the country’s infrastructure.
It focuses on integrating private participation of social sectors.
Applicability and Eligibility:
Within 30 days of receipt of the project proposal, Empowered Committee shall inform the Government/Statutory Entity about the eligibility of projects for Viability Gap Funding.
It can be only applicable to PPP projects proposed by Central Government/Central ministries/Statutory Entities as the case may be.
The project shall be implemented (developed, financed, constructed, maintained for the project term) by a Private Sector Company for funding.
Also the project should provide service against payment of a pre determined tariff or user charges.
A private sector company shall be eligible only if selected through open and transparent competitive bidding.
The proposal will be applicable only if the contract/concession is awarded in favor of a private sector company.
Funding:
Concerned State government/Central Ministries/Statutory Entities invites funds in the form of the capital grant within four months of the approval of the Empowered Committee. Whereas the period may be extended by the Department of Economic Affairs, if necessary.
State Government/statutory entity/Ministry will restrict funding to 20% of the Total Project Cost if the sponsoring State Government/Statutory Entity/Ministry aims to provide assistance over and above the stipulated amount under VGF.
Disbursement of Grants:
The VGF grant will disbursed at the construction stage only if the private sector company has subscribed and expended the equity contribution required for the project.
After the recommendation of the sponsoring authority, the Empowered Authority can release the grant to an escrow account.
The Empowered Committee, lead financial institution, and Private Sector Company shall enter into a tripartite agreement as prescribed by Empowered Committee from time to time.
Monitoring:
A lead financial institution (refers to the financial institution funding the PPP projects) shall send regular monitoring and evaluation of projects for the disbursal of VGF and quarterly progress reports to the Empowered Committee.
The revamped VGF has two components:
1. Sub scheme 1:
30% of the Total Project Cost (TPC) of the project is treated as VGF by the Central Government. Statutory entity/Central Ministry/State Government also provides additional support for funding (up to 30% of TPC).
Eligibility:
It mainly focuses on catering social sector projects such as Health, education, water supply, wastewater treatment, solid waste management. These projects may face poor revenue streams and bankability issues to serve fully capital costs, and also projects should have at least 100% operational cost recovery.
2. Sub scheme 2:
Undoubtedly this scheme supports demonstration/pilot social sector projects. Central and State Government provides up to 80% of capital expenditure and 50% of Operation and Maintenance(O&M) for VGF over the first five years.
Eligibility:
The projects should come from the Health and Education sectors with a minimum of 50% Operational cost recovery.
64 projects have accorded ‘final approval’ with a Total Project Cost of INR 34,288 crore and VGF of INR 5,639 crore since the inception of the scheme. VGF of INR 4,375 has been disbursed till the end of the financial year 2019-2020.
VGF Scheme has application in finance infrastructure projects. Not only infrastructure projects but almost all sectors of our economy also require funds to operate successfully. That’s why they seek the help of investment banks to raise funds effectively before launching their business. Are you considering a new business? Do you need funding? Drop a mail or fill-up the form below to get assistance right from the start.
startup-funding
3 TYPES OF INVESTORS: PRE, PASSIVE AND ACTIVE INVESTORS
An investor is a person or an entity that invest capital that many startups need. Investors are always looking for a return on their investment in the future. For this purpose, they seek to know more than just a great business idea or solid business plan. That is, they need to see whether you have proof of concept behind your thoughts. They may be looking for a startup having a competitive advantage and significant market size since there is no guarantee that one can make returns from investment. Most types of investors research investment opportunities based on risk tolerance. There are basically three types of angel investors. They assist throughout the business plan by advising to manage funds precisely and attempt to create goodwill for the startup. It further attracts more investors to invest, thereby improving cash flow.
For the success and growth of a startup, it is crucial to maintain a strong and sustainable relationship with investors. As we all know, investors expect a financial reward in return. Hence, the preferred investment will decide which each individual falls into a specific category. There are three types of angel investors based on tactics and attitude towards investing. Such as;
1. Pre-Investors
Pre-Investors are those individuals who haven’t started investing. He may lack financial consciousness or awareness, which could change the direction of their lives. They are very little concerned about investing. Likewise, there’s little savings or investment to exhibit. “Consumption needs” rules the pre-investor financial world, which doesn’t prioritize savings and investment. These investors spend most of their entire income to cover monthly expenses with no money left for savings. However, it is possible to transform this mindset of pre-investor entirely during this stage.
Likewise, some individuals may prefer to invest after a change of perspective. But they wouldn’t have a retirement plan or capital to fall back on. In any case, the personnel department doesn’t have to arrange it for them. When pre-investors procure more income, they spend more since lifestyle is more prior than monetary security. A pre-investor should set time for themselves to gain knowledge about personal finance, current market situation, and competition to improve their caliber and take action as an investor.
2. Passive Investors
Passive investors are ready to leap into investing with low maintenance costs. It is the most common starting point for financial security, mainly supported by financial institutions, educational services, and websites. They often prefer to invest for an extended period and adopt a buy-and-hold strategy. Generally, They depend on experts like brokers, money managers, and financial planners for their investment strategy since they lack the required knowledge and skill. These types of investors usually buy and hold security (mutual fund, stock, real estate) at retail price for a more extended period with minimal trading in the market. Unlike active investors, since they ignore market fluctuations/setbacks, they may not expect profit from short-term gains. Index investing (Index ETF and index managed fund) is a typical example of passive investing.
The positive side of passive investors includes complete transparency over their investments. They know precisely where their cash is and can eliminate and reinvest it wherever they see fit. Furthermore, when concerned about its negative side, it requires regular savings contribution to achieve financial security and generate lower returns than other investors.
3. Active-Investors
An active investor is an investor who takes more hand-on-approach intending to earn higher returns. He may dedicate most of his time and effort to saving money. They need to focus on building active strategies that add value in return on capital, which is not an easier task to follow constantly. The main difference between passive and active investors is that passive investors aim to get market returns. In contrast, active investors aim to beat the market index.
One significant advantage of active investors is that they receive two sources of return on investment: “market-based” and “value-added returns”. Suppose they can accurately assess the market and gain from price fluctuations. In that case, they can profit and quickly make trades from active investing. Also, they continuously monitor market conditions to identify short-term trading opportunities. They used to engage active fund managers to oversee investment on their behalf. This type of investor requires deep knowledge about wealth management to earn a return on their capital and a high confidence level to make investment decisions properly. The downside includes higher transaction costs and the risk of generating higher returns by incurring passive investing. Active investment can be a good choice for investors who have substantial time and energy to learn the pros and cons of marketing strategies.
WHAT TYPE OF INVESTOR DO YOU WANT TO BE?
Every investor is unique, having a different investment style. The right choice depends on the investor’s personal preferences, risk tolerance, and financial goals. So, there is no single answer which will be suitable for everyone. The first step toward the investment journey is to set a clear strategy. For example, if you are interested in the stock market and desire to put your efforts into accessing your funds, you may consider active investing. Suppose you have enough years before retirement and working hard to increase your income without any interest in learning the ins and outs of the market. In that case, passive investing might be worth exploring.
Pre-investor is the appropriate starting point for all individuals. They should take considerable time to learn about market conditions and personal finance options and step out from this stage to develop a vivid financial future. You can choose to be one of the three types of angel investors. Any individual can become an investor with just a little money at hand. Many people pass through these stages of investing as their knowledge, experience, and skills develop. These three types of investors determine financial security and ways to advance your investment strategy to the next level. If you are confused about the right investment option –Sign up for a consultation with us. We are here to support you!
Many startups lose new opportunities due to a lack of funding. So, they turn to banks and other financial institutions for fulfilling their financial needs. Collateral free loans (also known as Unsecured loans) are funding where loans are given without submitting any security/guarantee with the banks. These loans are available to applicants on the basis of their income, creditworthiness, and business performance. The interest rate of such loans will be higher when compared to secured loans. Address proof, ID proof, age proof, passport size photo, signature, IT returns, income statement, bank statement, financial statements by CA are some of the documents required for getting such startup loans.
Qualification for collateral-free loans:
The applicant should be age between 21 to 66 years.
Applicant should have a CIBIL score of 750 or more.
Applicant must be self-employed.
The business should be operational for at least two years. Some lenders require the business to have minimum 3 years functioning history.
The business’s annual income should be a minimum of INR 2 lakhs (turnover should not exceed INR 25 crore).
The applicant should be an Indian citizen with no criminal record or previous defaults from any financial institution.
The startup should have a feasible business plan, and innovative products should be provided.
The business should get approval from the Department of Industrial Policy and Promotion(DIPD).
Documents required to avail collateral free loans
PAN Card
Identity proof
Address proof
Bank statements
Business registration proof
Types of Collateral free loans for startups
1. Unsecured Term Loans:
These are long-term loans available for a specific time duration (generally 1-10 years). Also they are repaid in the form of EMIs. Indeed these loans are mainly for business expansion or growth, new product launch, purchase of machinery and equipment, construction of buildings, offices.
2. Unsecured Working capital loans:
As the term suggests, there is no need to pledge assets as security. Working capital loans are available for a short period for meeting day today business expenses such as inventory financing, rent payment, salary to employees. The loan is repaid within one year of acquiring it.
3. Unsecured Line of Credit:
It is also known as a revolving line of credit. Banking and non-banking institutions offer only a predetermined amount of funds or funds up to a limit at higher interest rates (since lending funds without collateral security are riskier for the lender). However, as a startup, they may require quick and recurring funding, so business lines of credit can be the best startup loan without a collateral requirement. One major advantage is that startups don’t have to pay interest on the borrowed amount for the first 9-15 months. To get this loan approval, startups need to prove that they have good personal and business credit scores and revenue history.
4. Business Credit Cards:
Business creditcards are one of the cost-effective funding tools for startups. It provides short-term cash flow with credit limits. It also helps earn rewards like cash back, preferred pricing, airline miles, and more like a personal credit card. Further, it helps to manage business finances through record-keeping. And all you need is a good CIBIL score to access these cards. Some of the best available unsecured business credit cards include Capital One Spark Classic, Capital One Spark Miles, The Blue Business Plus, and Chase Ink Business Cash.
5. Merchant cash advances:
Merchant cash advances are also known as Cash Advance Loans. Indeed it provides a lump sum of funds for your business growth in exchange for daily credit card/debit card sales. It is the most expensive unsecure startup loan in the market because it accepts businesses having poor or limited credit scores.
6. Equipment financing:
If you require expensive equipment for your startup, equipment financing will be a better option. Here the equipment bought at the time of starting the business acts as a security for the loan. Once the startup earns revenue, the customer can repay the amount either through lump sum or monthly installments. In case of non-payment, lender can seize the equipment to recover his losses. Thus, Equipment financing helps you to set up and finance machinery/equipment purchases.
Unsecured loans under Government Schemes
1. Credit Guarantee Scheme (CGTMSE):
Credit Guarantee Fund Trust For Micro and Small Enterprises headed this scheme. The government initiated this scheme to facilitate the flow of credit to MSEs engaged in manufacturing or service activities. Startup enterprises finds major benefits under this scheme. Also it allows startups to take loans at a reasonable rate of interest. But the maximum limit of a loan is 1 crore, and the loan amount depends on the eligibility and viability of the business. The lending institutions include Commercial banks, Private and Public banks, Foreign banks, Regional Rural Banks, SBI, and its associated banks under NABARD.
2. Pradhan Mantri Mudra Yojana(PMMY):
This scheme was launched in 2015, and it is headed by MUDRA. MUDRA stands for Micro Units Development and Refinance Agency. It grants funds to micro units and non-cooperative small business sectors. Furthermore the interest rate varies from bank to bank, and there are no minimum loan amount criteria. This scheme is again classified into three categories:
Shishu scheme: This scheme is primarily for startups providing loans up to 50,000.
Kishor scheme: The loan offered ranges from 50,000 to 5 lakhs.
Tarun scheme: The loan offered ranges from 5 lakhs to 10 lakhs.
Both Kishor and Tarun schemes are for different business stages and funding needs.
3. Standup India Scheme:
This scheme provides grants to women entrepreneurs and people under the category of SC/ST. The loan amount ranges from 10 lakh to 1 crore. Also it should be repaid within seven years.
4. Bank Credit Facilitation Scheme:
This scheme was headed by the National Small Industries Corporation(NSLC) to provide credit requirements of MSMEs units. Moreover the loan repayment tenure depends on the startup’s income, ranging from 5-7 years, and in some cases, it can extend up to 11 years.
5. Coir Udyami Yojna:
This scheme is by the Coir Board that aims to support coir units. It provides loans to project-based businesses with a flexible interest rate having a maximum period of 7 years. However, startups that have already assisted Government subsidy under any Indian or State Government scheme cannot benefit from this scheme.
Startups have a tougher time in obtaining funding. They seek unsecured loans from banks, financial institutions, and Government as funding sources because they may have no or little assets to be pledged at the beginning stage. Are you a startup? Let us know about your funding sources. If you haven’t already, get started with Scaalex to take advantage of getting the best investors for funding.
6. Market Development Assistance Loan Scheme
This scheme is launched to promote MSMEs for international exposure in trade fairs, exhibitions, etc. The scheme offers funding for –
SMEs participation in international trade fairs and exhibitions of manufacturing industries.
75% reimbursement of the registration fee.
SMEs given 75% reimbursement of the annual fee paid to the GSI for the first three years.
Participating for anti-dumping cases.
Features and benefits of collateral free loans
No collateral needed – No longer mandatory to pledge any asset as a security to avail credit facilities.
Flexible repayment tenure up to five years.
Minimal documentation required to avail online.
Quick and hassle free processing of applications, mainly due to a special cell taking charge of requests.
Loan is available to both existing and new MSEs.
No track record requirement.
Collateral-free business loans offers at competitive and flexible interest rates compared to other premium loan services.
Letter of Credit/bill discounting is available up to 180 days.
Major banks offering collateral free loans
Collateral free loans offered by major banks in India including but not limited to:
Axis Bank
State Bank of India
HDFC Bank’
UCO Bank
Bank of Baroda
State Bank of Hyderabad
Fullerton India’
FAQ – Collateral Free Business Loans
1.) Who is eligible for the collateral-free CGTMSE loans? Micro and Small Enterprise (manufacturing/ services) as defined under MSMED Act, 2006 and by RBI is eligible for this loan. Education and Retail sector are excluded.
2.) What is the maximum loan amount that can be sanctioned under CGTMSE loan? A maximum amount of Rs 1 crore will be sanctioned under CGTMSE scheme.
3.) What is the tenure of these loans? These loans provide flexible repayment tenures up to 5 years.
Increase your chances of loan approval
These are few things you can do to increase your chances of loan approval:
Strengthen your credit history
Make a solid business plan.
Choose an reputable lender
Discuss with your lender on how you are planning to use the funds
An investor contributes money to a business with the expectation of receiving a financial return. The main aim of any investor is to earn maximum profit with minimum risk. Most startups depend on investors to fund their startups. The investor’s fund will significantly support the company if the business introduces a new product or expands its operations. Investors help businesses get funded and ensure that the capital invested is correct and oriented towards either value or growth strategies. All investors are not the same; they may vary according to resources, capital styles, risk tolerance, and motivation. The investor’s quality and level of involvement determine the success or failure of a startup. So, it is necessary to understand different types of investors and learn how to choose the right one. Let’s take a quick look at the various categories of investors:
1. Personal investors:
Entrepreneurs could approach personal investors as a first resort as their family, friends, and close acquaintances. This type of investor supports startups or businesses to get off the ground. There is a limit on how much they can invest in your startup, so they might not give you much cash at once. They know and trust you the most, which is the best thing. However, you will require extensive documentation that outlines the rate of return, the amount of the investment, and ownership arrangements to assist you. Therefore, make sure to speak with a lawyer to avoid any potential obstacles.
2. Peer-to-peer lenders:
Peer-to-peer lenders are individuals or groups who provide capital to small businesses/startups through websites. Owners must apply with peer-to-peer lending companies likeProsper and Lending Club to get their desired money. Startups must create a business plan and share their financial forecasting, market research, and industry analysis. You may occasionally inquire as to how much money you have invested. Potential peer-to-peer investors will investigate the creditworthiness of the company. Once approved, the owner and the lender (a private individual) negotiate an interest rate for the investment. The lender then provides the funds to the owner.
3. Angel investors:
Angel investors are ex-founders who invest in startups or new entrepreneurs (also known as seed investors, private investors, business angels, or angel founders). Many people are familiar with them as the primary funding source and the most active type of investor. They could be wealthy business owners, executives, or business professionals. The best thing about angel investors is that they do not have to repay their funds if the business fails.
At the same time, investment is generally risky, and it should not exceed 10% of an angel investor’s portfolio or one out of every ten deals. An angel investor contributes funds in exchange for a higher rate of return (equity position and influence over management decisions). Moreover they are typically wealthy individuals who assist startups in their early stages of development and foster innovation to gain credibility and acceptance in their industry. They also provide advice to the businesses in which they invest. Through connections made by other startup founders, live pitch events, or direct online contact, you can get in touch with them. Before approaching angel investors, startups must ensure that their business is ready and has a plan.
4. Venture capitalist:
A venture capitalist (VC) is a person or company that invests in startups with long-term growth potential. Affluent investors and investment banks are examples of prominent venture capitalists or firms. They focus on growing businesses with solid business plans and high profits, so they expect some ownership and input into overall management decisions. VCs have relevant experience and connections to other investors and business leaders.
Startups may choose venture capitalists because they receive open funding as well as expert advice. They are not interested in high-risk start-ups that require a small amount of capital to get started. VCs invest in a large number of deals, say one out of every 100, whereas angels invest in one out of every ten sales. They conduct extensive due diligence on each investment, which can take up to 5 months. If you need a large cash infusion to get started, venture capitalists may be your best option.
5. Incubators and Accelerators:
Incubators are collaborative programmes that provide startups with access to funding opportunities, training, guidance, mentorship, and networks. Whereas, accelerators are program that help startups for rapid growth with financial support, training, mentorship, and networks.
6. Banks:
Startups seek the assistance of banks to cover their small business loans. Qualifying for a bank loan is challenging for early-stage startups and businesses. Banks typically request an overall business plan that includes a detailed description of the company’s product/service, financial and management projections, and strategies for goal implementation before deciding whether to provide funding in the form of a loan. You must demonstrate your financial stability. In addition to banks and other financial institutions, you should look into loans guaranteed by the Small Business Administration (SBA). SBA loan programmes include:
7(a) loan: 7(a) loans meant for purchasing equipment, inventory, working capital, real estate purchasing.
Microloans: Microloans consist of a loan amount with a maximum of $50,000 for purchasing equipment, inventory, working capital. The real estate already purchased or debts already arise does not come under this category.
504 loans: 504 loans are needed to expand the operations of startups say acquisition of fixed assets like land and building, real estate, modernization of existing facilities, debt refinancing.
Hopefully, you will be aware of the various types of investors available for startup funding. Every startup/company is distinct. As a result, selecting the correct type of investor is critical for your startup. Choose the best by assessing where your company stands and what is appropriate for you and your startup. Most startups fall short in this area. Worried? Don’t be! Get started with the assistance of our experts. We make sure that your new business gets off to a good start.
Here is a look at the ways that private venture capitalists fund small businesses. Many private investors are willing to fund your business startup up to a certain point. However they will not provide ongoing funding unless there are certain criteria or performance indicators that have been met. This article will provide details on how you can present your business plan and case for the VC funding.
A small business owner should work with a seasoned entrepreneur who has experience in evaluating and assessing your business. Presenting your business plan in front of an experienced financing entity can be extremely intimidating. However, this should not discourage you. There are several sources online where you can get financial backing from a variety of angel investors. You also need to compile a list of prospective venture capital investors that you have spoken to. So you have some possible options should you need to raise additional funds.
While working with a venture capitalist can be helpful, you must remember that this is funding for your business. Do not expect to receive free money from a venture capital firm. You must have a highly compelling business plan that presents a solid case for obtaining VC funding. To get substantial amount of VC funding you must show that your business has ability to generate a significant income. Additionally, as a small business you may need to meet certain criteria before you consider for venture capital funding.
Once you raised enough money you will need to raise additional funds to sustain operations and grow your business. You can do this by selling some of your assets, such as office furniture, advertising, and certain types of equipment. Depending upon your own personal circumstances, you may need to increase your personal credit limits to obtain a larger amount of financing for your business. You will also want to consider increasing your employee numbers. Having more employees can provide you with an opportunity to obtain a loan early on if you start your business with only a few employees. Your personal credit can also be improved by making your business more profitable.
If you are looking for a small business loan, your options will be much different than a large corporation. Because of small business regulations, most banks do not make loans to small businesses. Therefore, your best bet for obtaining financing will come through a private investor or other third party. Sometimes you can secure a business loan from a bank if you can convince that your business has a higher chance of being successful. Addition to this if your credit has been impressive to a bank or other institution, you may be able to get a line of credit that is based solely on your personal credit.
In some situations, you can obtain financing from the SBA even if your business is not considered a small business. If you are starting a gardening business you can try for small business loans from the SBA even if it does not qualify as a small business. On the other hand, if you are starting an online business, you will almost definitely not qualify for small business loans from the SBA. This is due to the fact that there are a number of differences between an online business and a traditional business.
Also you can obtain small business loans from the SBA even if your business does not meet the definition of a small business. For this you have to provide the lender with a business plan so that they can determine if you will be a good investment. Although this process can take some time, it will be worth it in the long run. In addition to providing the lender with a solid business plan, you also want to prepare a financial proposal. This is a document that will show how you will use the funds that you receive for your business. You should definitely include a financial forecast to project the income that you will generate in a year.
When you apply for financing from the SBA, you can expect to get an approval very quickly. You will probably receive a decision within a day and allow to get back to focusing on your business running. However, even after you get approval, you may find that you are still not able to get enough money from your potential VCs. If so, you should consider talking to several different venture capitalists for financing they might be willing to provide.
