The initial stages of creating a startup can be exciting — being your own boss, working flexible hours, and building something from the ground up. Finding the funding to transform an idea into a viable business venture, however, is a reality check for many entrepreneurs.
With little business history or proven revenue, startups can find it challenging to come by funding. However, some planning, determination, and creativity can help you get the money you need to kick off your startup.
This guide will explore 13 ways to fund a startup and explain how to go about getting the financing.
Key Points
• There are many options for startups to acquire funding, including borrowing from friends and family, using personal savings, crowdfunding, seeking angel investors, or taking out a small business loan.
• Many startups seek initial funding from friends and family who are willing to invest in the business idea, often with less formal agreements compared to institutional investors.
• High-potential startups often attract angel investors or venture capitalists, who provide significant funding in exchange for equity or convertible debt, typically seeking substantial returns.
• Banks and online lenders offer business loans or lines of credit, with options like SBA loans providing competitive rates and longer repayment terms for qualifying startups.
• When seeking funding from outside sources, you’ll likely need to submit information about your business, including your projected annual revenue, credit score, and business plan.
Considering Types of Startup Business Funding
There are two broad categories of startup financing available to businesses — debt financing and equity financing.
Debt financing involves borrowing money to fund anything from working capital to equipment or inventory. The borrower is liable for repaying this debt and may be charged interest. Although collateral may be required for certain forms of debt financing, the borrower retains ownership of the business (as long as the debt is repaid).
The other method for raising funds is equity financing. By selling equity to investors, startup businesses may be able to obtain the capital they need to launch or expand.
Equity financing doesn’t involve the same debt repayment, though it does mean giving up some ownership of the company. That means that it may be helpful in establishing a positive cash flow for the business as quickly as possible. Emerging startups with large working capital needs might prefer forms of equity financing that let them grow quickly.
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13 Types of Funding for Startups
Securing funding is a critical step for startups looking to launch and grow their businesses. From traditional loans to innovative crowdfunding platforms, here are 13 types of funding options for entrepreneurs.
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1. SBA Loans
The Small Business Administration (SBA) is a federal agency that partners with lenders such as banks and microlending institutions to provide SBA loans to startups and small businesses. Instead of directly lending to the businesses, the SBA guarantees a portion of the loan, which lets startup businesses access loans with more competitive rates and repayment terms.
SBA Microloans
SBA microloans are available for funding options for startups. This program is administered through nonprofit lending organizations, which can provide up to $50,000 in startup microloan funding for working capital, supplies, furniture, equipment, and machinery.
To receive SBA microloan financing, startup owners may have to participate in training and planning activities designed to help them launch their business ventures. This extra support might help accelerate the funding process and increase the chances of success.
7(a) Loans
SBA 7(a) loans are versatile, government-backed loans designed to help small businesses with funding needs like working capital, equipment, or real estate. Offering up to $5 million with competitive interest rates, these loans require strong financial documentation, a credit score of 680 or higher, and a clear repayment plan.
504 Loans
By way of contrast, SBA 504 loans are long-term, fixed-rate financing options designed for small businesses to purchase or improve fixed assets like real estate and equipment. These loans provide up to $5.5 million, promoting business growth while supporting job creation in local communities.
2. Merchant Cash Advance
Instead of taking out a loan, you might want to consider a merchant cash advance (MCA), which can help startup businesses gain quick access to capital. For an MCA, you exchange a portion of your business’s future sales for a cash advance.
Rather than charging interest as a percentage, MCAs utilize a factor rate — expressed as a decimal figure — to calculate repayment. For example, a $5,000 MCA with a factor rate of 1.3 will total $6,500 in payments made through future sales ($5,000 x 1.3 = $6,500). MCA repayment plans may use a fixed schedule or withdraw a percentage of your startup’s sales.
Criteria for MCA approval can differ from those required for traditional debt financing methods. Generally, MCA companies place more weight on business performance than on an applicant’s credit score. This accessibility can come at a cost, though, so other options may make more financial sense unless funding is needed right away.
3. Equipment Financing
Businesses in need of costly technology or machinery may be able to use equipment financing as a funding stream for their venture.
Equipment financing has some advantages as a funding option for startups.
For starters, equipment can usually act as collateral to help a business qualify and secure a lower interest rate for the loan. This is potentially useful for applicants who have faced obstacles to other financing due to limited assets and/or time in business.
Equipment financing might require a down payment, but typically, it lets startups hold onto more working capital than some other financing types. With more cash in hand, businesses can make key purchases and pursue other financing methods if needed.
When assessing equipment financing options, it’s important to compare how the repayment term and the equipment’s useful life line up. Otherwise, startups run the risk of eventually having to make payments on equipment that’s no longer being used.
4. Business Line of Credit
For quick access to flexible working capital, a business line of credit could be a useful funding mechanism.
A line of credit gives you access to an amount of funding with a maximum established by the lender. Once secured, the line of credit acts like a revolving fund that your startup business can draw from for a variety of purposes, as long as the amount you spend stays below the credit limit.
Besides this flexibility, a line of credit can help startups establish a credit history without accumulating significant debt. Unlike conventional loans, for a line of credit, interest is only charged on the amount owed at any given time. Repaying the borrowed amount replenishes the line of credit so that it can be used again at a later date.
5. Grants
Small business grants are awards given by a government agency, foundation, nonprofit, or other entity. In most cases, they don’t have to be repaid. Small business grants may come with guidelines about how the money must be used, though these terms typically have some flexibility.
For federal grant opportunities, Grants.gov and Challenge.gov are good places to begin searching.
Grants may be sector- or demographic-specific in their focus. Here are some examples:
• Small Business Innovation Research (SBIR) Program: These grants provide funding to encourage businesses to undertake research and development for the federal government.
• Amber Grant: This program awards three $10,000 grants to women-owned small businesses every month.
• Street Shares Foundation: This group awards three grants between $4,000 and $15,000 to startups or small businesses owned by veterans or their spouses.
• USDA: The agency offers multiple grant programs for rural startup businesses.
Since grants don’t involve debt or transferring equity, they’re highly coveted by startup businesses. This fact, added to the fact that most grants are geared towards existing businesses, makes grants a more difficult funding source to obtain.
6. Crowdfunding
Rather than taking on debt or giving up equity, startups can launch a crowdfunding campaign to raise money.
Crowdfunding initiatives can widely vary in structure and funding goals. To attract financial backers and raise awareness, a campaign might host a promotional event or offer complementary products in exchange for financial contributions. Some startups may choose to simply pitch their vision to garner support.
While supportive family members and friends may be a logical audience to start with, utilizing online platforms can expand your startup’s reach.
Keep in mind that platforms like KickStarter often take a percentage of the total funds raised or employ a competitive vetting process, like SeedInvest. It’s helpful to weigh how much time to spend on a crowdfunding campaign versus the expected reward.
7. Angel Investors
An angel investor is a high-net-worth individual who seeks to increase his or her wealth through strategic investments in startups and business ventures. Depending on the nature of the relationship, an angel investor’s financial support may come as a one-time investment or as ongoing funding.
Generally, funding and mentorship from an angel investor is given in exchange for ownership equity. This support can be critical during a startup’s early growth phase.
Entrepreneurs may find an angel investor among their own family, friends, or professional circle. Joining a business incubator or accelerator is another way to gain mentorship and meet potential benefactors.
Preparing a thought-out business plan and coming in with a valuation for the ownership percentage could help you seal the deal.
8. Invoice Financing or Factoring
The common thread of invoice factoring and financing is that both let you use your company’s invoices to secure a cash advance and free up cash flow.
With invoice factoring, a lender buys your selected outstanding invoices and advances you the full invoice amount, minus a fee. That lender then is in charge of collecting the money. Instead of incurring new debt via bank loans or lines of credit, you are submitting your unpaid invoices for financing based on the strength of the customers’ credit.
As for invoice financing, you are more in control of the clients’ invoices. You use those invoices as collateral in order to receive a lump sum of financing before they’re paid. Usually, you’ll receive between 80% and 90% of the invoices total face value upfront. Once the invoice is paid, you’ll receive the remaining balance, minus any fees charged by the lender.
9. Friends and Family Loans
When trying to figure out how to fund a startup, many entrepreneurs turn to financing from their close relationships. But it’s important to get this right — or else you could end up with resentful, angry friends and family.
It’s best to present your case with the aim of helping them understand why you need the money. Keep your pitch professional. Give them detailed information on how you’ll use the money, the time it will take you to repay them in full, and the amount that you’ll pay in interest.
Very important: Have a written agreement ready that explains all the loan details before you approach your friend or relative. Before that person disburses the funds to you, you should both sign the agreement to seal the deal.
10. Personal Savings
Roughly 78% of startup financing comes from personal savings, according to a SCORE survey of 1,000 small business startups.
The biggest advantage to self-funding is control. The fruits of your sales and investment come directly to you, and you won’t be tugged into a direction you don’t believe in because of an insistent investor.
But of course self-financing is expensive. Some people find they make serious lifestyle changes to fuel their startup goal. If the small business owner has a “day job” as well, that job may suffer from divided priorities.
Moreover, if you’re using your own money to cover production costs of a specific service or product, a large order can be too much to handle, and growth opportunities might be missed.
11. Venture Capital
Venture capital (VC) is a popular choice for startup financing options. It’s a way to secure the capital business owners need to grow, with the extra advantage of tapping experienced industry contacts for mentoring and advice. Venture capital for startups can be an exciting opportunity.
Just remember that taking on venture capital should be a partnership between your startup and the firm, and since the relationship is one that may last for years, you need it to be a good fit.
12. Small Business Loans
Another option for funding is a small business loan from a bank, credit union, or online lender. Small business loans for startups offer a vital lifeline for entrepreneurs seeking to launch or grow their ventures.
However, startups often face stricter requirements for small business loans, such as a strong credit score, a detailed business plan, and sometimes personal guarantees or collateral.
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13. Peer-to-Peer Lending
Peer-to-peer lending programs eliminate the bank as a middleman, allowing borrowers and lenders to connect via online platforms. For many borrowers, this financing offers faster approval. For investors, it can be an opportunity to support businesses they are passionate about.
Getting Funding for a Startup
On average, 4.7 million small businesses are started every year in the United States — and 20% of them fail in their first year. Having a plan for startup financing options could make the difference by helping you survive year one and grow your startup into a successful business venture.
The process of obtaining funding can vary depending on what type of funding you’re interested in and what the prospective source is. However, the information you should be ready to provide includes:
• How long you’ve been in business
• Your projected annual revenue
• Your personal credit score
• Your business plan
• What industry you’re in
Since many startups have less revenue and experience to demonstrate to lenders and investors, personal creditworthiness and finances can factor into the funding equation. An entrepreneur could choose to leverage his or her personal credit to qualify for financing. And having a solid business plan to show potential lenders that you have a good roadmap is also a practical idea.
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The Takeaway
There are many startup financing options, including SBA loans, merchant cash advances, business lines of credit, and traditional business term loans. Small business funding can give your small business the boost it needs to cover startup costs, expand operations, purchase inventory, hire staff, or invest in marketing strategies, helping you achieve your growth and profitability goals.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Is there a type of funding that is best for startups?
More than 70% of small businesses get started with personal savings. As for other funding sources, small businesses may turn to angel investors, business credit cards, or small business loans.
Where can you look for funding for your startup?
You can look for startup funding from personal savings, friends and family, angel investors, venture capital firms, crowdfunding platforms, and small business loans.
What is bootstrap funding in startups?
Bootstrap funding in startups involves using personal savings, reinvested profits, or minimal external resources to fund business operations. This approach allows entrepreneurs to maintain full control of their ventures, avoid debt, and focus on organic growth.
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