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15 funding options to start a new small business

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February 9, 2024
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15 funding options to start a new small business

Starting a business can be a daunting task, especially if you lack the capital to get it off the ground. Finding the funding to start a business is one of the biggest hurdles you'll face as a small business owner.

According to a 2023 Small Business Survey, 54% of small and mid-sized business owners start their business with personal funds with 79% needing less than $100,000 to start their business and 43% needing less than $10,000. Fortunately, there are plenty of funding options available to help you get started. Lendio explores some of the most popular choices for how to get money to start a business. Let's dive in.

Bootstrapping

Bootstrapping is the process of funding your business using your own money and resources. It's a great way to keep you in control of your finances and avoid taking on debt. This method usually requires a lot of hard work, sacrifice, and creativity, but it can pay off in the long run. Examples of bootstrapping include working from home, relying on personal savings, using free or inexpensive marketing channels, and building your product or service in-house.

Crowdfunding

Crowdfunding is another popular option for raising money to start a business. You can set up a crowdfunding campaign on platforms like Kickstarter, Indiegogo, and GoFundMe. The idea is to offer incentives to people who donate to your campaign, such as early access to your product, a shoutout on social media, or even equity in your company. Crowdfunding can be a great way to get early validation from your target market and build a community around your brand.

Friends and family

Another common source of funding for starting a business is to seek help from friends and family. A lot of entrepreneurs initially turn to those they trust for financial assistance. This method can be beneficial as the terms are often more flexible and the interest rates more favorable than conventional loans. If you choose this route, it's crucial to make it professional: draft a formal business plan, clearly communicate repayment terms, and consider establishing an official loan agreement. 

By treating it as a business transaction, you can maintain healthy personal relationships while securing the capital needed to kickstart your business. But remember, borrowing from friends and family should be approached with caution, as it could potentially strain relationships if not managed professionally.

Small business grants

Depending on your industry and location, you may qualify for small business grants. These are usually offered by local or state governments, nonprofits, and private organizations. Small business grants come with fewer restrictions than loans, and you don't have to pay them back. However, they can be more difficult to obtain, and they often require a detailed business plan and proof of your project's potential impact.

To look for small business grants, you should begin by checking out your local and state government websites. They often have information about available grants and instructions on how to apply. Online platforms like GrantWatch and Grants.gov can also be helpful resources. These websites aggregate thousands of active grant opportunities from federal, state, and local governments, as well as private foundations.

Credit cards

Credit cards are another potential source of business funds that is especially useful for smaller, frequent expenses or as a short-term cash flow solution. Business credit cards often come with benefits like cash back, travel rewards, and special rates for specific categories of purchases. Importantly, using a credit card for business expenses can help you build your business credit, which can aid in securing larger financing down the line. 

However, credit cards should be used judiciously, as high interest rates can add to your debt if the balance isn't cleared promptly. Always consider the interest rates, fees, and repayment terms before opting for this method, and strive to pay off your balance in full each month to avoid accumulating debt.

Personal loans

You can apply for personal loans from banks, credit unions, or online lenders. Because these loans are based on your personal creditworthiness, they can be easier to obtain than business loans, especially for new businesses. However, it's important to note that—since the loan is tied to your personal finances—you will be personally responsible for the repayment. Failure to repay can impact your personal credit score. 

As such, while personal loans can be a good option for initial funding, they should be considered carefully, and you should ensure you have a solid plan for repayment before opting for this route.

Business loans

If you haven't yet started your business and started generating revenue, you'll have a hard time qualifying for a business loan. Once you've been in business for six months, you can start to qualify for financing options like a business cash advance, invoice factoring, or equipment financing. After a year or two, you can start to qualify for a term loan, SBA loan, or line of credit. You can get a business loan from a bank, a credit union, or an online lender.

Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, is another viable option for securing funds to start your business, especially if you're a homeowner with substantial equity in your home. A HELOC works somewhat like a credit card, where you are given a credit limit based on the amount of equity you have in your home. You can borrow up to this limit during a draw period, typically 5-10 years. 

What's advantageous about a HELOC is that you pay interest only on the amount you borrow, not the total equity available to you. Plus, the interest rates are usually lower than those of credit cards, making it a more affordable option. However, keep in mind that your home serves as collateral, and failure to repay the loan could put your home at risk. Therefore, like with all other funding options, it's important to have a solid repayment plan in place when considering a HELOC.

Retirement savings

Tapping into your retirement savings is another way to fund your startup. If you have money saved in a 401(k) or an IRA, you might consider using some of it to launch your business. This method has its pros and cons, so it's important to weigh them carefully. On the plus side, you're essentially borrowing from yourself—which means you won't have to go through a credit check or application process—and you won't incur any debt. Additionally, you might have access to a substantial amount of money, depending on how much you've saved. 

However, the downside is that you're risking your financial future. If your business doesn't succeed, you could lose a significant portion of your retirement savings. And even if your business does succeed, you'll still have to make up for the money you've withdrawn from your retirement account. Before you decide to use this method, consider consulting with a financial advisor to understand the potential risks involved.

Angel investors

Angel investors are affluent individuals who provide capital for a business startup, usually in exchange for convertible debt or ownership equity. They can provide much-needed seed funding to get your business off the ground. Angel investors may also provide valuable mentorship and access to their business networks. Websites such as AngelList and SeedInvest make it easier to connect with potential angel investors.

Venture capital

Venture capital is a type of equity financing typically provided by firms to startups and early-stage companies that have been deemed to have high growth potential. Venture capitalists take a share of the company in return for their investment, and they may also require some level of managerial and strategic control. Getting venture capital can be a competitive process, but it can provide significant funding and valuable business expertise.

Business incubators and accelerators

These are programs designed to support the successful development of entrepreneurial companies through an array of business support resources and services. Business incubators focus on the early stage of a startup, providing entrepreneurs with the skills and advisors necessary to grow their business. Accelerators, on the other hand, typically focus on scaling a business and helping it grow fast.

Partnerships

Forming a strategic partnership with another business can provide valuable funding. In return for funding, partners can receive equity, a percentage of sales, or the option to merge or acquire your company in the future. Choose your partners carefully as they'll have a large influence on your business.

Government programs

Various government entities offer programs to support small businesses. The U.S. Small Business Administration (SBA) has several funding programs for startups, including the Microloan program and the SBA Community Advantage Program.

Customers

You may be able to secure funding through your customers. Pre-selling your product or service, and asking for deposits or subscriptions can provide you with the funds to start or grow your business. This method also validates your business idea, proving that there's a market for your product or service.

If you're wondering how to get money to start a business, there are plenty of options available to you. Keep in mind that each method has its pros and cons, and it's up to you to decide which one fits your needs and goals best. 

This story was produced by Lendio and reviewed and distributed by Stacker Media.

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