13 ways to get startup business funding

Most new businesses require more capital than they believe they may need to get off the ground. How you bankroll your business may affect how it is organized, managed and expanded. No matter which option or options you choose, one thing is for sure: starting a business is expensive.¹ Choosing the most suitable loan or a blend of loans that best fits and serves your business is key to success and growth. Here are a few common approaches to funding a business startup.

How to qualify for a startup business loan

Finding the right loan for your startup can be time-consuming. We’re covering 13 of the most popular small business loans, but there are still more options. The process of qualifying for a startup business loan is as varied as the loans themselves, but in general, most lenders will examine the following criteria: credit, collateral, cash flow, the amount of time you’ve spent in other business ventures, your business plan, the industry you plan on getting into, and the amount of debt you’re carrying concerning your income.¹⁰

How to apply for a startup business loan

The type of loan you’re looking to secure for your business will determine how you apply for it. No matter where you decide to apply for your business startup loan, you should know the lender’s qualifications, have as much of your financial history in order as possible, and have a strong business plan that is well-written, designed, and easy to follow.^4,9,10

1. SBA loans

The Small Business Administration (SBA), a government agency, defines their role as: “… working with lenders to provide loans to small businesses. The agency doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. The SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.”²

Pros: Low-interest rates, favorable repayment terms, low down payments

Cons: May have a longer approval process than other lenders; good credit is typically required

2. Business line of credit

Similar to a credit card, this option is one in which a bank agrees to loan you a set limit that cannot be exceeded. The nice part, however, is that like a credit card, you can repeatedly pay it down and continue to spend up to your limit.^3,4

Pros: Fast and flexible, backed by a bank

Cons: High and sometimes variable interest rates, good credit is typically required, short repayment window

3. Crowdfunding

Crowdfunding is a purely digital, low-risk method relying on virality, shareability, and demand in the market. This method requires thoughtful branding and an incredibly well-crafted creative pitch that blends copy, video, images, animations and illustrations.^3,5

There are several types of crowdfunding: 

• Reward-based requires a reward plan, such as free products or services.
• Equity-based offers shares of your company in exchange for financial investment.
• Debt is similar to a loan except business owners work with multiple investors instead of working with one lender.
• Donations can cover start-up costs or a project.

Pros: Interest-free funding and generally simple to set up. Money may not need to be repaid and there’s likely no credit check.

Cons: Exceedingly crowded space, and something is usually expected in return from backers (early access, discounts, perks, etc.). There may not be as much guidance, and there are federal restrictions on how much you can accept from individual non-accredited investors.

4. Angel investors

Angel Investors are wealthy individuals who see potential in your business and are willing to invest large sums of cash. These are the people who, after a thorough examination of your business plan, are ready to take the significant risk of investment in hopes of a considerable reward.^3,6

Pros: Fast cash and most typically reaches a fully-funded phase quickly

Cons: Typically require you to give up equity, investors are often involved with — or contribute to — business decisions

5. Venture capitalists

Venture capitalists take a business from idea to market at breakneck speed, often funding in phases or series called “rounds.” They are usually organizations with far-reaching influence and the means and methods to put something groundbreaking into the market.

Pros: Speed and agility of a massive, well-connected organization backing and fully funding the idea

Cons: Typically requires equity in the business, and they often get a say in executive decisions

6.  Invoice financing

Invoice financing can be a good funding option as it lets businesses borrow capital from their unpaid customer invoices. It can function as a cash advance and allows invoices to be used as collateral to secure a loan or line of credit.

Pros: Can be fast to fund and are ideal for B2B companies and seasonal operations since outstanding invoices are necessary to obtain funding, i.e., collateral. 

Cons: APR fees can be expensive, and you’re relying on customers to pay their invoices in full and on time; if not, you may get charged late fees.

7. Microlenders

Microlenders are more flexible than traditional bank loans regarding applications and repayment plans. Microlenders can be made up of non-profits or even local community groups. They typically look at personal references and collateral instead of your credit score.^3,7

Pros: Good for those with little business experience and/or a less-than-stellar credit history.

Cons: Usually limited to $50,000 (USD), higher than average interest rates, can be slow to fully fund if you need a lot of cash.

8. Government grants

Each year, the federal government sets aside a predetermined sum of money across many categories to award to small businesses, startups, research groups, etc. However, these grants do come with caveats. If you are to “win” such a grant, the government gets a say in how the money should be spent.^3,4,7

Pros: Essentially “free” money and no fees apply.

Cons: Extraordinarily competitive, complicated and lengthy proposal process.

9. Series funding

Series funding is a multi-stage, multi-investor type of strategy where capital is raised in “series,” often for more or less equity, depending on what round of investment an individual or organization feels comfortable joining. The earlier a party enters, the more equity it stands to gain and the higher its risk. Typically seen as seed funding, then series A through C, with seed funding being the highest risk.⁸

Pros: Connections to a diversified network of investors and access to large sums of funding during each stage.

Cons: Requires giving up equity and high-level investors often want to make or influence business decisions and direction.

10. Equipment financing

This type of financing is a smart option for business owners of restaurants, manufacturers, printers, etc., who need equipment but also require cash for other business-related needs. The equipment serves as collateral, and financing of this type can help you get your business up and running faster without spending all your cash upfront.

Pros: Fast way to get your business up and running, you own the equipment once it’s paid off, minimum credit score required.

Cons: Variable interest rates can be higher than average, and a minimum amount must be borrowed occasionally.

11. Personal funds

The most common way to fund your startup is to do it yourself. This approach means using your personal savings. This approach should be examined and approached with extreme caution and, preferably, with the advice of a financial professional.

Pros: There’s no one to answer to — except yourself or your team. All monies made are kept in-house, allowing you flexibility and speed to make instant decisions on how to spend money.

Cons: Extremely risky; you need a long enough runway to remain solvent and to pay (or not pay) yourself.

12. Small Business Credit Card

Small business credit cards are tailor made for startup business owners, as well as owners of large companies. First, it’s important to determine your business’s needs, as some cards will serve your business better than others.

According to the IRS, “business expenses are ordinary and necessary costs incurred to operate your business.” With this insight, consider your expenses, from travel, technology, office supplies and furniture to mortgage or rent, insurance and payroll. It’s important to note you must keep your personal and professional costs separate. Also, you don’t need a “brick and mortar” storefront or many employees to apply for a business credit card. 

Pros: Improves cash flow, sets up spending controls, and can offer cash-back percentages and travel incentives and benefits. If used appropriately — with a commitment to on-time payments — a business credit card can positively impact your credit rating.

Cons: Your personal credit history is considered during the application and review process. And a business credit card may be more expensive to finance company expenses than a standard loan.

13. Bootstrapping

Bootstrapping is when an entrepreneur starts a company with little money, principal or assets, often relying on outside investments. Bootstrappers rely on personal savings, lean operations or a cash runway to start and grow their business. Once more, consider your business and operating expenses; do you have high upfront capital investments to form? Lots of inventory to turn around? You’ll also want to consider how revenue will be cycled through your business, i.e., if your operations are funded by bootstrapped cash, you’ll want to decide how that revenue will be used and dispersed so as not to risk cash loss.

Pros: You maintain control over all spending decisions. 

Cons: Bootstrapping may not provide enough investment to become successful at an equitable rate and pace. 

Small Business funding best practices

When it comes to the best approach to funding your startup business, here are a few tips to consider:

• No financial solution is a “one size fits all,” so be sure to pull a business plan together, outlining your business strategies and your anticipated expenses. This will give you an idea of how much you’ll truly need.
• Determine how much funding you’ll need and then create a financial plan to outline how you’ll use, manage and/or disperse the funds.
• Research and evaluate all funding options, i.e., loans, a business credit card, and/or investors, and consider what approach makes the most sense.
• Seek advice from other business owners: How did they start? What funding sources have or have not worked for them? The journey of others can help you avoid pitfalls while also giving you insight into what is truly beneficial.
• As the adage says, “Don’t bite off more than you can chew.” Only borrow or leverage funding options that make fiscal sense for you and your business.

For more resources to help you build your business, visit the Nationwide Business Solutions Center.