Sources of Startup Business Funding
When you think of startup funding, you probably think of angel investors and Silicon Valley. But every business needs startup funding—also commonly referred to as startup capital or, simply, business loans—not just big tech companies with billion-dollar dreams.
The whole point of startup funding is to provide the initial money needed to turn a business idea into a reality. Startup funding can come from a wide variety of sources depending on the business owner and purpose of the company.
But even though there are many options for finding startup capital, it can also be the most challenging type of funding for any small business to secure. Nascent businesses don’t have a revenue history, customer growth, or a credit history, which makes it difficult to prove your business’s ROI potential to investors and lenders.
Here, we’ll explore the most common forms of startup funding, as well as detail how to get it, so you can fund your startup costs and grow your business.
1. Personal Savings and Loans
Most businesses start from personal savings and loans, especially for new business owners. Between cash from a personal savings account, retirement rollovers as business startups (ROBS), getting personal loans, or selling off property to get startup capital, most people start businesses with their own money.
Part of this is convenience. If you use your own money, you don’t owe anybody anything later. Your personal credit and loan histories may help you get a lower rate on a personal loan.
The other part of it is necessity. Many programs like SBA loans or bank loans aren’t available to business owners who haven’t put any of their own money into their business. After all, if you don’t believe in your business venture enough to finance its early days yourself, why should anyone else?
How to get it:
Take a look at your personal assets. Does your retirement account qualify for a ROBS to fund your business? Are your personal savings in a healthy place?
2. Family and Friends
Family and friends can also be a great resource when it comes to starting a business. If you have the support of your loved ones, they may be inclined to give you a loan or invest in your business. Of course, mixing business with personal relationships can get complicated.
Don’t take a loan from family or friends if you know you can’t pay it back. If you do take a loan or investment, give them the same business documentation you would an ordinary lender and write up a legal agreement. If you value your friends and family and want to maintain those relationships, you should treat their business interests with respect.
How to get it:
Ask your friends and family, but be ready with a great pitch and an offer to repay them with interest or with a stake of the company. Also have a loan agreement ready to go, but also be willing to negotiate your terms so both parties are comfortable.
3. Vendor Credit From Suppliers
If your business is in need of supplies, raw materials, equipment, or business services to get started, you could be eligible for vendor credit. Many vendors are willing to work on “net 30” or longer terms. This means that you have 30 days after the invoice date to pay the vendor what you owe. Terms could also be “net 60,” “net 90,” and so on.
Vendor credits may come with a flat fee or an interest rate, or you may lose out on a discount that you would have gotten if you paid right away. But if you feel like you have a great product or business that will catch on quickly, a vendor credit is a great way to start your business with relatively little overhead.
Plus, since most major vendors report to business credit bureaus, vendor credits are a good way to start building credit for your business. However, be sure you have a plan to pay off your invoice by the deadline—otherwise, your business, credit, and relationship with that vendor will suffer.
How to get it:
Most major vendors in service industries have a process in place for applying for and receiving credit. When you’re researching vendors, explore that policy and make sure you apply with plenty of time to get approved, get your materials, and get your business up and running.
4. Business Credit Cards
Just like personal credit cards, business credit cards give you flexible purchasing power when you’re starting out so you can get what you need now and pay for it later. Many business credit cards offer great perks for new businesses too, from statement credits if you spend a certain amount to rewards for spending more.
But like personal credit cards, business credit cards vary widely in annual fee, APR, and perks. Make sure you do your research before you choose the right one for your business. And, as always, pay off the statement balance every month to avoid interest.
The exception to this rule, and an especially appealing business credit card for startup funding, is a 0% APR introductory offer credit card. These types of cards offer an introductory period—typically around nine to 12 months—where you can carry a balance without paying interest. If used correctly, this can help you fund your startup costs upfront and pay them off incrementally over your intro period. Just be sure you have a plan to pay off the balance before the introductory offer ends and a variable APR sets in.
How to get it:
Spend some time researching the best business credit card options out there, as well as what you can actually qualify for, and then apply. Business credit card applications can be completed easily online and you’ll find out if you’re approved in minutes.
5. Business Lines of Credit
Like a more powerful business credit card, a business line of credit gives you the purchasing power you need now, in exchange for paying back what you spend—plus interest—later. Where a business line of credit is different, is that it operates like a traditional loan in that you can borrow cash. Like your personal credit limit, a business line of credit gives you a maximum amount that you can borrow against. Once repaid, most business lines of credit reset to their original limit and you’re able to borrow from it again.
Another advantage of a business line of credit is that you only pay interest on the amount you borrow—not the total you’re approved for (unless you borrow the entire limit, of course).
Many banks offer business lines of credit to businesses that are already banking with them. Online lenders also offer business lines of credit if you don’t already have a bank relationship to leverage/
How to get it:
Speak with your current financial institution to see if they offer business lines of credit. If they don’t, explore online alternative lenders. Getting approved for a business line of credit will have more qualifying criteria than a business credit card. Expect to provide a good credit score, some time in business, and proof of business revenue. This can make business lines of credit out of reach for many startups, but if you have previous business success to draw on or a strong personal credit history, it may be possible.
Microloans are small short-term loans specifically designed for startups and other small businesses without the credentials to qualify for a more traditional business loan.
The Small Business Administration (SBA) offers a microloan program that benefits newer businesses. The maximum loan amount is $50,000 and loans are geared toward disadvantaged businesses that may have trouble getting access to capital. Beneficiaries are often businesses owned by women, veterans, minorities, or those in rural communities.
While SBA microloans have a notoriously arduous application process and slow approval times, there are also other microloan sources, such as Kiva, Accion, LiftFund, Grameen America, and Opportunity Fund.
How to get it:
If you already have a checking or savings account with a bank, ask if they have a microloan program available to new businesses. If not, consider these above lenders, research their requirements and application process, and then submit your application.
7. Business Term Loans
Business term loans are the most traditional type of startup funding. They come from traditional lenders like banks, credit unions, or online lenders.
Business term loans offer a specific loan amount with a set repayment period. That period may range from six months to longer than 10 years, depending on the lender, amount, type of loan, and your business credentials. While term loans are pretty uncommon for startups because they require a longer business history, short-term loans will be your best bet as a new business. Because you have to repay the loan more quickly, lenders are less at risk.
How to get it:
Term loans will require significant documentation and, truthfully, are uncommon for businesses young than two years old. Some banks will make exceptions for experienced business owners launching a new venture, but new business owners are either unlikely to get approved or will get approved at a very high interest rate.
Talk to your local bank and research online lenders. If you have a relationship with a bank already, this could help you get approved. Otherwise, online lenders tend to have more lenient requirements—usually in exchange for higher interest rates.
8. Small Business Grants
Small business grants differ from other forms of startup funding in that they don’t need to be paid back. In other words, grants are essentially free money for your business. So, what’s the catch? Grants are incredibly competitive. There’s only so much money to go around and competition for funds that don’t need to be repaid is understandably fierce.
Grants typically have very stringent requirements. You may need to be in a specific industry or location, plan to hire a certain number of employees, improve a community, or reach an underserved market. Grants also exist to benefit women entrepreneurs, minorities, and veterans.
How to get it:
The thing to keep in mind about business grants is they’re highly competitive and often have very specific criteria to qualify. Do your research to find the grants that cater toward your type of business and then submit an attention-grabbing application. Sites like the SBA or aggregate sites can help you find the right opportunities. And keep in mind that new grants are always coming onto the scene, while others may be closing their applications. It can be helpful to keep a spreadsheet to track your grant applications and important dates.
Crowdfunding has emerged as a viable means of acquiring startup funding. Not only that, but it can also get customers and early adopters excited about your new business venture. There are four main types of crowdfunding platforms:
- Rewards: Kickstarter and Indiegogo are the most popular crowdfunding platforms, in which you offer rewards to backers in exchange for their monetary support.
- Debt/Loans: You borrow money from backers that must be repaid over time.
- Donor: Raising money through donations. GoFundMe is the most popular example.
- Equity: Platforms like Angelist and WeFunder allow you to raise money through private investment, giving backers an equity stake in your business.
Crowdfunding takes real work because there are so many businesses already active on these platforms. People—both consumers and investors—must be truly excited about your product or service. That kind of buzz isn’t always easy to generate.
How to get it:
Crowdfunding encompasses a variety of platforms, each of which comes with its own terms and conditions. Think about what kind of financial support you need before choosing your platforms. Then, spend time developing an eye-catching and compelling campaign that will entice people to donate. To start, you may want to check out campaigns that are already live to see what they do well and how you can achieve a similar effect.
10. Venture Capitalists and Angel Investors
While it’s not an option for many startups, if your business has enormous growth potential, you may be a prime candidate for equity investors. When it comes to equity investment, the primary characters are venture capitalists and angel investors.
Venture capitalists want to invest in high-growth startups, which makes them an unrealistic option for the vast majority of new small businesses. Their investments tend to be in the millions. Truthfully, venture capitalists rarely venture outside of tech, health care, energy, or media.
In return for a venture capital investment, you will give up an equity stake in your business and you may also be required to create a board seat for that investor. While not taking on debt can be appealing for some business owners, the tradeoff is you will no longer be in complete control of your business or the decisions that are made.
While venture capitalists typically invest massive amounts of money at a pivotal stage for a startup, angel investors tend to be involved at the inception of a company and invest smaller amounts of money. Angel investors often act alone, rather than in large investment groups, as venture capitalists do.
Bear in mind that most businesses that seek angel or VC funding do not get their funding. Preparing your business to seek funding is a time-consuming process. If you put in an initial investment to develop your product and improve your startup’s growth and revenue in the short-term, it can also prove expensive. Be very sure you’ve carefully weighed the risks and rewards.
How to get it:
To start, you will need a killer business plan. Investors will likely expect significant returns within a few years and will want to hear how you plan to deliver. After connecting with potential investors (either through your business network or groups that cater to these types of transactions), you will pitch your business plan.
If you hook an investor, or multiple investors, they will invest in your business, typically through an initial round of “seed stage funding” or “seed funding.” Down the line, provided that your business is growing and still showing strong potential, you may raise subsequent rounds of funding, referred to as Series A, B, C, etc. funding.
11. Incubators and Accelerators
In the investment capital world, there are additional resources available to high-potential startups. Incubator programs are designed to match accepted, top-tier startups with mentors and tools to help them progress from ideation to operating as a real company. Incubators often provide a bit of seed money, as well. Accelerators are similar, in that they pair startups with investors and mentors who will help them reach the next stage of growth.
These are more formal approaches to getting funded and typically exist only in the tech, health care, or energy sectors. They are, however, an excellent way to get a foot in the door to the investment community.
How to get it:
Research your options and be prepared to show how your business is different from others in the industry, on track for significant growth, and what you’d be able to accomplish with the startup funding you’re seeking. While this won’t provide you with fast funding, this can be a great opportunity to make a name for your business.
The Bottom Line
Startups, like startup funding, come in many shapes and sizes. While most new business owners start their venture out of their own pocket or with the help of friends or family, there are a number of resources available to new business owners.
Whether you’re ready to grow immediately or you need some time to fully develop your business model, there’s a funding solution for you. To start, make sure you’ve calculated your startup costs so you know what kind of funding you need to launch and grow your startup.