How to Get Funding to Start a Business

You have the great idea for a new business. Full of passion and enthusiasm, you lay awake at night thinking about your perfect customer and how thrilled they will be at what you can offer. Perhaps it’s the realization of a lifelong dream—or simply the perfect application of your skills and experience.

There’s just one problem, you realize—starting a business costs money. Maybe even a lot of money up front. If you’re wondering how to get funding to start a business, then you’re not alone.

It’s a question that many would-be entrepreneurs have before they even get started.

The Basics of How to Get Funding to Start a Business

Whatever the reason you might be wondering how to get funding to start a business, most entrepreneurs quickly realize that the financing process is rarely a simple or straightforward one.

Unless you’ve gone through the process before, searching for the best funding to start your business can be overwhelming. There are so many questions to consider. How much do you really need? Do you need funds quickly? Do you need capital all at once? Can you put up collateral for a loan? Do you need expert business advice as well as funding? How much can you afford?

To answer all these questions, you need to know how business funding works and what options are available to you.

In simple terms, funding for your business comes in two types—debt financing and equity financing. Although there are also non-traditional methods for funding a business, most financing options you consider will fall into one of these two categories.

Let’s take a deeper dive into the specifics of funding options that might be a good fit for your business:

How to Get Funding to Start a Business: Debt Financing

If you’re an aspiring small business owner wondering how to get funding to start a business—debt funding could be a great place to start.

Debt financing qualifies as any scenario in which you borrow a set amount of funds to be repaid plus interest over a period of time.

Though debt financing is the most common form of funding to start a business, there are benefits and inherent risks to pursuing this option. On one hand, debt financing lets you maintain total control over your business—and if you’re very successful, you don’t have to share the additional profits.

At the same time, you also bear the full risk of that debt in the event that your business fails. Because you’ll most likely be asked to put up significant collateral or sign a statement of personal liability for your business loan funds, there is no option to just walk away if things don’t go as planned.

Types of Debt Financing

There are a variety of different small business loan options you could pursue as funding to start a business, and the right choice for your needs depends on factors like how quickly you can pay back the loan, your planned use of the funds, and how quickly you need cash in hand.

As you review the various answers to your question of how to get funding to start a business of debt financing available, though, keep in mind that your personal financial history and qualifications may limit your options.

Some lenders won’t work with brand-new businesses—so if you’re planning to pursue debt financing, consider how you might take a bootstrap approach to the business so that you will be able to show some revenue history when you apply for a loan.

SBA Loans

Working together with intermediary bank lenders, the U.S. Small Business Administration offers a variety of loan programs that can help small business owners get the funding they need at a more affordable cost than may be available through a traditional business loan.

Because SBA loans are partially guaranteed by the government, they are attractive for lenders as well as small business owners. Proceeds from SBA loans can be used for just about any business purpose, from working capital to purchasing equipment.

The downside to working with an SBA loan is that the application process is lengthy and usually takes longer to close, meaning the time between application and when the funds are actually dispersed is longer.

Your personal or business credit score needs to be healthy (620+), and you might also be required to provide collateral as well as a down payment to secure the loan.

Term Business Loans

Term business loans are just like traditional bank loans. Lenders give you cash up front for a specified period of time at a specific rate of interest. You repay the loan amount along with any up-front fees and interest over the agreed upon “term” of the loan.

Since these loans can be used for almost any business purpose, flexibility is an advantage of this loan product.

If you choose a term loan for funding to start your business, be prepared to complete a lengthy application process. Lenders typically look for a credit score of 600+ and, again, you may need to furnish collateral.

Short-Term Loans

If your wondering how to get funding to start a business but have poor credit or a new credit history, short-term financing might be your best option.

Short-term loans function just like traditional term loans but with a much shorter term of repayment—most often between 3 and 18 months—and payments are due on a weekly or even daily basis. The credit requirements for short-term loans are not as stringent as those for regular term loans, so a personal credit score of 525+ is usually acceptable.

Because of these more flexible credit requirements, short-term loans can be a great starting option for new business owners who are struggling to obtain other forms of funding to start a business. That said, the stress of frequent payments can be a challenge for businesses with unpredictable cash flow—so it might be best to start with a smaller amount of funding to make sure that those payments will be manageable.

Equipment Financing

If the purchase of equipment—such as a vehicle, computers, kitchen appliances, or major manufacturing equipment—is a significant piece of your business’s funding needs, equipment financing might be a useful tool.

Equipment financing is especially attractive for new business startups because the collateral for securing the loan is built right into the loan—meaning there is often no requirement for a personal commitment of collateral.

The term length of equipment loans is typically dictated by the expected lifetime of the equipment, so you need to consider whether your equipment will be obsolete and need to be replaced before you would be able to make full repayment.

Business Line of Credit

A business line of credit works similarly to a credit card cash advance. Banks or other lenders set up a specified maximum credit line from which you can then draw necessary funds whenever you need and in whatever amounts you need.

The greatest benefit to a business line of credit? You only pay interest on the amount you actually use, which can be helpful if you’re not entirely certain how much funding you’ll need or when the expenses will crop up.

Of course, the flexibility and convenience of a business line of credit does come at a cost, as interest rates tend to be higher than some other traditional funding tools. Even so, paying a higher rate for funds you’re actually using will usually cost you less in the long run than taking out a term loan just to have the funds sit in your bank account.

Personal Loans

Did you know that funding for your small business can also come from personal loans? These are especially useful for truly brand-new businesses where there is no financial history to provide for lenders. In many cases, interest rates on personal loans are lower than those required on business loans. This makes them more cost-effective for a new business over time.

For personal loans, lenders will be looking for a decent credit score (580+) and collateral might be required. It’s also important to keep in mind that taking on a personal loan for business means taking full personal responsibility for that debt in the event that your business fails. Carefully consider risk before opting for this method of funding to start your business.

How to Get Funding to Start a Business: Equity Financing

If your loan options are limited or if you would rather not go immediately into debt to start your business, equity financing might be a better choice for your needs.

Equity financing simply means working with an investor to meet your business’s startup funding needs in exchange for the  “ownership” of part of your business.

The big advantage? There are no weekly or monthly repayments to be made. That said, giving away a significant stake in your business does come with some downsides.

Let’s dig deeper into exactly how equity financing works, then review some of the options that may be available to your business:

Investor Financing 101

Let’s say you have done your due diligence in researching the type of business you intend to grow. You’ve looked at examples of similar businesses. You’ve researched the market base in the area you will operate. And you have a vision for where you want your business to go and a preliminary plan for how you intend to get there.

Even so, you know that starting a business is risky. You might not succeed, and you aren’t in the position to take personal responsibility for repaying a business loan if your venture does not succeed.

If this sounds like your reality, now is the time to “sell” your business plan to individuals who have the funds and the business expertise to help you achieve your business goals. By offering a stake in your business’s ownership in exchange for upfront financing, you can obtain funding to start a business without bearing the full financial burden of making sure that your plan is successful.

Types of Equity Financing to Consider

There are a few good options for working with investors to jumpstart your business, and the best choice depends on the type and size of business you are building as well as your ability to come to a shared vision with your equity partners.

As you consider the various equity financing scenarios shared below, think about how much control you are willing to hand over and how involved you want an investor to be in steering the business direction and philosophy.

Angel Investors

An angel investor is a wealthy individual—often one who has already built one or several successful businesses of their own—who believes in the merits of your business idea and your ability to grow it successfully into a thriving, money-making business. Because of this confidence in your plan, they are willing to invest large sums of up-front cash in exchange for a set amount of ownership in the company.

The term “angel” isn’t coincidental here. To a struggling entrepreneur, the combination of funding and expertise that these investors provide can truly feel like divine intervention. That said, most angel investor agreements require giving up a significant stake in profits and control of your business—so consider carefully whether you’re comfortable working and compromising with this individual over the long haul.

Venture Capital Investors

A more formalized, group iteration of the angel investor model, venture capital companies are typically composed of investors seeking to fund and mentor businesses that will eventually become large and very profitable corporations.

Venture capital firms typically deal in investments of no less than $1 million, and equity requirements can often be very high. As a result, this method of funding to start a business typically isn’t the right fit for smaller business models.

Incubator Programs

Designed to give a small startup business access to funds along with mentoring and other resources, incubator programs provide a host of benefits for young entrepreneurs.

From building relationships with potential investors and business management experts to gaining access to business space, equipment, and software, startup entrepreneurs can receive a significant jumpstart to their business growth through these programs.

Pros and Cons of Investment Funding to Start a Business

For many, equity financing is an attractive option to get funding to start a business.

First, there is no traditional “debt” incurred and therefore no monthly/weekly payments to drain a new business’s cash flow. And because funding amounts can be customized to fit exactly what the business needs, you have more flexibility to adjust to the often changing needs of a developing business.

However, the biggest drawback to equity financing is that you, the owner, must give up at least some ownership—and therefore control—of your business. So, before you go shopping for venture capital or angel investors, take a good look at what you want your small business to look like in 5 or 10 years, and prepare yourself for the reality that investors might want significant input in how things are run.

Non-Traditional Funding Options for Small Business Owners

In some cases, your best options for funding to start a new business might come from a less straightforward and more creative source—one that can’t be as clearly defined as through traditional debt or equity financing terms.

Consider one of these non-traditional funding options may be the right choice to help you finance part of all of your business’s capital needs:

Friends and Family

When looking to get funds to start a business, don’t limit yourself to just business and finance experts. After all, who better to support and help finance your business goals than the people who care most about your success?

Financing your business with the help of friends and family can be arranged as an investment or as a loan, depending on the preferences of both parties.

Regardless of how you decide to structure the funding, though, do take care to put the terms of the agreement in writing just as you would with a formal lender or investor. Make sure everyone involved has clarity and documentation of what was agreed at the start. That’s critical for protecting your personal relationship in the event that your business endeavors don’t go exactly as planned.

Crowdsourced Funding

If you’ve ever thrown in $20 on a friend’s Kickstarter campaign, you’re already familiar with the concept of crowdsourced funding.

In essence, this non-traditional method of funding a business is just friends and family funding on steroids. Instead of asking one or a few of your well-off personal contacts to make a significant investment, you’re leveraging technology to seek smaller investments from a larger group of people.

Launching a crowdfunding campaign is a great way to build visibility for your new business. And if your funding needs are minimal, it can be the perfect option.

However, keep in mind that crowdfunding campaigns can be time consuming to produce—so you’ll want to weigh the costs and benefits of this solution.

Grants for Small Businesses

To any aspiring entrepreneur, nothing sounds better than the words “free money.”

Although grants for small businesses—a form of startup funding that requires no repayment or trade of equity—are hard to come by, they do exist and are worth seeking out as a supplemental financing option.

Small business grants tend to be very specifically geared by business type or circumstance, so you’ll want to carefully research a program that matches your niche and tailor your application to align with the grant sponsor’s goals.

Self-Financing Your Business

No matter how you get funding to start your business, the reality is that in almost every case, you will be expected to put in at least some of your own money.

Many small business lenders require a down payment, and most investors will want to see that you have skin in the game before they’re willing to put up their own hard earned cash.

Small business owners can take a couple of different approaches to self-financing all or part of their business funding needs. Whether you’re relying on personal savings, cashing out a 401(k), or borrowing against the equity on your family home, what’s most important is that you feel confident enough in your business model to put your personal assets on the line.

How to Choose the Right Funding Option for Your Business

Getting funds to start a business can be a daunting task. There are so many options that navigating a decision can be overwhelming. However, you can begin your search for funding to start a business by narrowing your focus between debt, equity, and non-traditional options.

To help you decide between these two funding directions, ask yourself these questions:

• How much funding do you need?
• How much control are you willing to give up now and in the future?
• Are you looking for business expertise as well as funding?
• Can you afford to repay loans?
• Do you need the funding quickly?

As you weigh your options for how to get funding to start a business, keep in mind that it may take several of these financial tools in combination to best fit your needs—and you might not need to obtain all the funding at the same time.

The beginning stages of building a new business can be both exciting and stressful. To limit the stress involved, resolve to be prepared and thoroughly knowledgeable about your business needs, then do some shopping around to find the funding option that best fits your long-term goals.

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