Startup capital can be the most challenging type of small business funding to secure. Finding the right source of funding for a new business without a track record of revenues, customer growth, or solid credit isn’t easy. But even though it may take more work to land this kind of financing there are options available. Here we’ll talk about two ways to get money to start your business idea:
- Startup financing
- Investment capital
How to Get Startup Financing
In startup entrepreneurship, there are three routes you can take to launch a startup:
- Self-fund your venture. Also called bootstrapping, this is where you provide the money needed from your savings. With this avenue, you don’t have to give away any ownership of your company to investors.
- Seek out investors. You can either search for venture capital firms or individuals willing to put an angel investment into your business. Most likely, this route will require you to hand over partial ownership of your company.
- Apply for small business loans. Small business loans won’t take away any of your ownership in the company but you will have to start repaying them right away, with interest (which likely won’t happen with investors). Also, you’ll probably need to be an established company rather than a new startup to get a traditional business loan.
Because the startup business model usually requires a large amount of capital from the get-go, most startups turn to fundraising. We cover the different types of startup funding below.
The Best Startup Financing Options for Small Business
There are over a dozen common ways that small businesses and startups can get their hands on financing. Requirements vary, however. And some sources of funding may be easier to get for certain industries.
Furthermore, some of the lending limits for programs won’t be enough for the more expensive industries (such as technology or medical) to move the needle. To know which of these options are best for you, ask yourself a few questions:
- How much initial funding do I need and how long will that last?
- Do I have a community of fans or supportive investors that can pitch in
- How long do I need to pay back funds?
- When will the funding be available as a return for individual investors?
- Do I have good personal credit scores?
Knowing your needs, qualifications, and challenges will help you as you move through this list. Check each option for clues that it may be a good fit for you and your startup needs.
1. Personal savings and loans
If you’ve ever watched small business reality TV competitions, you’ve likely heard the term “bootstrapped.” This is a common word that conveys a business founder used what they had on hand to get their business off the ground.
In many cases, this could be cash from savings, cashing out retirement funds, borrowing via personal loans, or selling what they had for extra cash.
This option of funding is the most common type of startup financing. Not only is it popular, but it’s also often required. Many SBA lending programs won’t loan out money if the owner hasn’t invested any of their own available funds (equity) in the business.
The negative side of using personal assets and loans is just as it would seem. If the business fails, you are left with nothing and are personally liable to pay back any personally-guaranteed loans or credit accounts.
2. Family and friends
If you’re lucky enough to have the support of your loved ones, it’s possible they may make a loan or invest in your business. This is a tricky area for funding, as mixing business and relationships comes with substantial risk. If your business fails, can your friendships with friends and family survive?
If you do decide to ask for money from people you know, give them the same business documentation you would a typical lender and get your agreement in writing. Treat friends and family as you would any other professional business partner, lender, or investor.
3. Vendor credit from suppliers
If you already purchase supplies, raw materials, equipment, or services for your business, there is an opportunity to get these items for some time and pay for them later. It’s called “vendor credit,” and often starts with “net-30 terms” where you get 30 days after the invoice date to pay it back. But some suppliers will extend longer terms— net-60, net-90 or net-120 for example. You’ll need to apply for this type of credit ahead of time; don’t just pay your bills late.
There may be a fee for vendor credit, including a flat cost or an interest rate. Or you may have to give up a discount for paying your bill right away. Many of the larger vendors have a process in place for applying for and receiving credit. The good news is that these companies also often report to business credit bureaus. On-time payments will help establish excellent business credit!
4. Business credit cards
This is an easily-explained way to get money for your startup. Like personal credit cards, business credit cards give you flexible purchasing power to buy the things you need in your business every day. If you pay your bill off in full each month, you’ll have up to two months interest-free on purchases (depending on how you time those purchases.)
You can also track employee spending, get rewards with every purchase, and get some fantastic perks, such as free checked bags or discounts on popular business services.
Like consumer credit cards, the most popular business credit cards for startups will vary in cost and value. They may have no annual fee or cost hundreds in fees, interest, and employee card costs. Do your research when applying.
Your personal credit will be checked when applying for business cards, so check your free business and personal credit scores before you apply.
Crowdfunding can be an excellent way to get fans and early adopters on board with your idea, even possibly giving them a first-try at your product or service if they back you. There are four main types of crowdfunding platforms:
- Rewards: think IndieGoGo and Kickstarter. You offer a reward to backers.
- Debt/Loans: Kiva is a popular example here. You borrow money that must be repaid.
- Donor: GoFundMe is the most popular example here. You raise money through donations.
- Equity: Platforms such as Angelist and WeFunder allow you to raise money from investors by giving them an equity stake in your business. (Some platforms only raise money from accredited investors—generally wealthy individuals—while others are broader.)
Whether you need a small or large about of money, it takes work to raise funds this way. You’ll need to be able to spur interest in your campaign and that means you’ll need to do a great job marketing it. Even the most buzzed-about, fully-funded campaigns are made up of hundreds – if not thousands – of small supporters.
6. Invoice financing
If your business has clients who aren’t paying quickly, invoice financing can help you qualify for financing. Your outstanding invoices to calculate what you should be able to borrow safely.
As you collect your invoices, you pay the lender back. While rates can be a bit higher for these loans, the requirements are less strict. Almost anyone who has outstanding invoices from creditworthy businesses may qualify, even if you haven’t been in business very long.
7. Equipment financing
Getting a loan to purchase equipment, specifically, is called “equipment financing,” and it works like financing any other piece of tangible property. The amount of the loan is based on the value of the item you finance, and the item itself is used as collateral. If you don’t pay the loan back according to the agreed terms, your equipment may be repossessed.
Rates may be higher for new businesses, but it may still be a decent option. Another alternative is equipment leasing, which may be offered through the sellers of the equipment or through third party companies.
8. Business term loans
Business term loans offer a loan of a specific amount, usually with a specific repayment period of anywhere from six months to 10 years or more. Repayment periods of two to five years are the most common. These small business loans may come from traditional lenders such as banks or credit unions, or through online lenders.
Loans through traditional lenders will require greater documentation. But be forewarned: banks are often risk-averse and getting a first-time business loan through a bank can be difficult if your business is less than two years old. Some will make exceptions for experienced business owners who are starting a new business.
9. Business lines of credit
Similar to a business credit card, a line of credit gives you a way to pay for items as you need them. The business line of credit, however, is also like a traditional loan in that you can easily borrow cash. You can borrow and repay the money as often as you like, provided you don’t go over your credit limit. The maximum can range from $5,000 to up to hundreds of thousands of dollars or more.
The main advantage is that you only pay interest on the amount you outstanding. Pay it back and stop paying interest. There shouldn’t be a penalty for early payment, but be sure to check. A business line of credit can be helpful for those times where cash flow is tight.
These lines are sometimes offered to businesses who already do other banking services with an existing institution, so ask your bank if this is an option. Online lenders also offer lines of credit. Keep in mind though that if your business is very new the credit decision may be based on the owner’s personal credit, and excellent credit may be required.
10. Small business grants
One of the most sought-after forms of funding, small business grants don’t have to be paid back. (Though Uncle Sam will expect you to pay taxes on grants received.)
But the reality is they are not easy to get; competition is often stiffer than for any other funding sources.
Grants may be limited to companies that can demonstrate their ability to hire a certain number of workers, change a community, or reach an underserved market, something that startups can rarely prove at such an early stage in their journey. While you shouldn’t count out grants as a legitimate way to get cash, pinning your hopes on them isn’t a good strategy.
11. SBA Microloans
The SBA Microloan program from the U.S. Small Business Administration offers smaller loans for which younger businesses may qualify. The maximum loan amount is $50,000. These loans are geared toward disadvantaged businesses that may have trouble getting access to capital, including businesses owned by women, veterans, or underserved communities, as well as those in rural communities.
Despite the focus on representation, however, the application process can be time consuming and approval can take a while. That makes this a tough option for those with a business that needs startup financing right away.
Another useful SBA program to look into is the Small Business Investment Capital (SBIC) program. This program partners with small business investors that the SBA licenses — and the SBA matches their investment $2 to $1. You can get between $250,000 and $10 million with a typical interest rate between 9% and 16%.
12. Other microlenders
The Small Business Administration isn’t the only way to get a microloan. Some private organizations, business groups, and industry associations make microloans to qualified businesses. Major banks have even been known to give out these small business loans — although they might not call them “microloans.”
If you already do business with a lender (through your checking or savings, for example), ask what programs they may have available. An increasing number are adding microloans to their service offerings.
The term “startup” is often associated with a specific type of small business: one that needs a fairly large amount of capital right away and works toward aggressive growth within a relatively short time.
There are many reasons why a startup needs to gain momentum so rapidly. For one, the nature of many startup industries requires them to be nimble yet disruptive. They may even be first to market, so that they can lead with their product or service idea. They usually need a large amount of initial funding to get this done.
For startups that need funding to grow rapidly, seeking investment capital from equity investors may be an appealing option for getting the funds you need. But it’s not easy to do, and can be both time-consuming and expensive.
How Venture Capital Works
Venture capitalists seek out high-growth startups. This makes venture capital a less-than-realistic choice for any startup or young company out of the tech realm or other popular sectors such as healthcare, energy or media and entertainment.
This type of investment involves the sale of a portion of the company to the investor and may require that you create a board seat for the investor. Investors want to keep a close eye on their investment and even assert some control to ensure their return.
Venture capitalists are investors or investment firms with sizable amounts of money to work with. While venture capital investments used to be limited to a few firms, large companies such as Starbucks and Google each have venture funds too.
Angel investors, by contrast, usually invest smaller amounts, and often invest at earlier stages.
Venture capitalists use money from other sources to provide relatively large (often in the millions) investments. This type of investment can be a game changer for the business that receives it, but it comes with a challenge and a price.
If you’re looking for venture capital, you’ll need to be prepared. These are very qualified, intelligent and thoughtful groups of individuals and they will certainly do their due diligence. If you think your business plan is detailed enough, think again.
Be aware that the investor will be expecting significant (think in the neighborhood of 20% to 30%) returns within just a few years. Do your homework, dive in and do the research, and prepare to wow them and answer their questions.
Keep in mind that very few businesses that seek out angel funding or venture capital are successfully funded, and being a startup company can further jeopardize those odds. It can be time-consuming and expensive to go this route and as a startup founder your time may be better spent developing or marketing your product or service. Still, if you think you have a strong pitch and position within your market, it may be worth looking into.
How Startup Funding Stages and Rounds Work
Getting money for a newly launched venture is more complicated than getting a standard loan for an established small business. As the explanation of venture capital hints at, there is a lot of due diligence that investors and startups go through to see if they will be a good match for equity partnerships. Here’s how the process looks:
- The entrepreneur approaches potential investors, angel investors or venture capital firms with their business opportunity
- If there is sufficient initial interest they are invited to pitch
- After research, meetings and due diligence, the investor that decides to invest and provides a term sheet
- The first round of funding with investors, during the initial launch, is usually called “seed stage funding or seed funding”
- Subsequent rounds of funding are titled with a letter series. The first round after seed stages is “Series A funding,” for example. Then, Series B funding, Series C funding, Series D funding etc.
- A convertible note may also be offered as seed financing. This is a type of short-term financing that can be turned into equity in the company.
- After each VC firm or venture capitalist has been invested for a period of time (often 4-6 years), they take their exit. This is where they earn their money back by selling shares, through an initial public offering (IPO), through a merger or acquisition.
Again, keep in mind that each investor will expect a return. It’s not a company’s interest to spread themselves too thin with investment partners. While obtaining financing is the main goal, it can’t come at the downfall of those who have private equity in the startup.
Incubators and Accelerator Programs
Within the funding world, there are a few other options. Incubator programs are designed to match accepted startups with mentors and tools to get them from the idea stage to working company, and often gives them a bit of seed money to get started.
Accelerators work in the same way, pairing startups with investors and mentors who want to help them reach the next level of growth. A more formal approach to the funding game, these programs use a hands-on method of allowing invested parties a way to involve themselves in the success of their chosen startups more carefully.
Nav Is Your Partner to Find Funding
Remember, while some people invest in hedge funds or coins, others are eager to get in on the ground floor of something new and special. There is money available to promising startups with something to offer the world. Research, along with expanding your network, will get you there faster. Many successful companies stress that connecting to those who want to invest in startups is key.
If a traditional or angel investor doesn’t work out, however, today’s market offers plenty of options for businesses. Sign up for a free Nav account to see your best options instantly. With over a dozen proven financing vehicles, your next phase of growth may just be an application away.
This article was originally written on June 17, 2019 and updated on August 17, 2023.