As thrilling as it is to start a new small business, the stress can be just as insane. Especially if you’re worrying about money and have to start looking into sources of finance for your startup. Because beyond the creative thinking and careful planning that go into coming up with a winning business model, you as the business owner are likely also facing the arduous task of finding the money to make it all come to fruition.
It’s a prospect that can leave many a startup owner to wonder, “Where do I even begin to look for financing for my new business?”
Luckily, you don’t have to be an expert in finance or banking to successfully find the right funding option for your business. With careful research, realistic expectations (emphasis on this one), and a willingness to make some tough decisions, you can and will find sources of financing for your startup to provide you with the funding you need.
Some of these routes to funding might be ones you expect, but others might surprise you. We’ll explore all of the sources of financing that every new business should look into when starting up.
The sources of financing available to startup businesses range from traditional debt-based financing—what you think of when you imagine small business loans—through more inventive alternatives like business credit cards and credit line builders. Then, of course, there are ways to raise money that involve tapping the community around you. Each involves a different level of risk, a different type of credit profile, and a decision on how, exactly, you want to set the tone for raising money from the start of your new business.
These sources of financing for your startup do have one major thing in common—and those are the expectations you need to have around the kind of capital you’ll be able to raise.
You’re going to face limitations as a brand-new business owner seeking access to financing. Generally speaking, lenders consider it a “safe risk”—as much as something like that exists—to work with businesses that have at least a one-year history of successful operation. This might limit your search for a lender—and in all likelihood will eliminate some of the more traditional type of loan products available to you.
But don’t be discouraged if getting your funding doesn’t happen as quickly or as easily as you had hoped. You still have lots of sources of financing available to your new small business. You just have to know where to look.
→TL;DR (Too Long; Didn’t Read): Most traditional lenders want to see at least a year of business history before issuing financing, so startup funding will require some creativity.
Although many traditional lenders might prefer that you wait a year before pursuing funding, you still might want to think about seeing what options there are for sources of financing for new small business. After all, we know that you’ll likely still face significant expenses and funding needs in that first year of business.
Some good options available to brand-new businesses that can help you get up and running:
One of the best government business startup loans. Originally created to make startup business funding more easily accessible to women, minorities, and veterans, the US Small Business Administration’s SBA microloan program partners with community-based, nonprofit, intermediary lenders to provide small business borrowers with loans ranging from $500 to $50,000.
Carrying interest rates between 8% and 13%, and term lengths not to exceed six years, traditional loans that these desirable rates and terms are rarely if ever available to brand-new businesses outside of this SBA-subsidized program.
In addition, SBA microloan lenders are unique because the Small Business Administration intentionally chooses them to work face-to-face with the new small business owners as mentors as well as lenders. (It’s one of the many advantages of SBA loans.) Within this role, microloan providers act not only as a source of financing for a new business but also as counselors offering advice on business management, marketing, and finance for the ongoing success of microloan borrowers.
You might see this part coming: With all of those desirable perks comes a lot of competition. And that makes the application and approval processes for the SBA microloan program not only difficult but long. Applying for an SBA loan in general can take time, and borrowers might find themselves jumping through what feel like unnecessary hoops to stay compliant with the program’s training requirements.
But if you can meet the requirements for an SBA loan, the process is worth it.
If you’re looking for a more flexible source of financing for your new business, consider a business line of credit. Often described as a hybrid between a credit card and a traditional business loan, a line of credit is a pool of funds established by the lender with a maximum credit limit. You can draw from the line of credit for nearly any business purpose and in any amount, up to the credit limit.
The biggest advantage to the business line of credit is that you only pay interest on the amount you’ve used at any given time. So, your credit limit may be $30,000, but if you only withdraw $10,000, then you only pay interest on that $10,000 that you’re actually using.
Beyond this flexibility, here are a few other key advantages of the business line of credit as a source of finance for new businesses:
For these reasons, the business line of credit is a source of finance worth exploring for entrepreneurs seeking funding within that critical first year of business operations.
For business owners with very strong personal credit and a new business idea that you feel really good putting your own finances on the line for, a personal loan for business might be worth considering. These loans have the advantage of being simple: no hidden fees, no fancy formulas, just a basic personal loan.
Personal loans vs. business loans tend to have lower interest rates as well as easier repayment terms—and they can also be used for nearly any purpose.
That said, here is the disadvantage—and this is important: When you take out a personal loan for business, the lender is entering into a contract with you as an individual—not with your business. This means that if bad fortune strikes and the business fails, you are still fully and personally responsible for repayment of the outstanding loan amount.
See If You Qualify for a Business Loan
→TL;DR: You do have a few traditional financing options including applying for an SBA microloan, a business line of credit, and—if you have stellar personal credit—a personal loan for business. But remember, only do the latter if you’re willing to put your personal credit entirely on the line.
We’ve talked about some good debt financing options to use as sources of finance for a new business. And all of these will establish business debt that requires regular repayment, predetermined with a small business lender. Each one requires an application and approval process that varies from several days to a few months, depending on the type of small business loan you’ve secured.
That said, many of the more traditional loan products listed above are limited in their use, or can carry higher than usual interest rates for brand-new business owners.
If these don’t seem like the right sources of funding for your startup, or you’d like to think about others, a business credit card is an additional option available to new small business owners. It can get you funds quickly and at a very affordable interest rate.
Advantages of Business Credit Cards
In the current economy, it’s not unusual to find new small businesses whose owners got them started using funds from business credit cards.
Particularly during the critical first year of business when traditional funding options may be more limited, plenty of small business owners have relied on business credit cards as their primary source of early funding. You just have to find the right one that works for you—and you can.
There’s the obvious advantage of keeping all of your business spending on one account—helping you keep a hold on day-to-day business expenses, yes. But using a business credit card from Day One of opening your business can also give you access to a revolving line of credit at low- or no-initial cost. This means you always have extra capital on hand for emergencies.
Here are a few of the distinct advantages to financing your startup with a business credit card:
With all these advantages, there are still some cautions to keep in mind. Before you use a business credit card for a startup loan, carefully consider how much you’ll be putting on your card. Carrying a high balance on your card can have a negative effect on your business’s credit score, making it more difficult to secure other forms of business financing in the future.
Take care to pay on time, every time, and avoid missing payments, as these will result in high fees, might cause your interest rate to increase, and will damage your credit score. As soon as you can, begin paying the balance in full each month.
See the Best Business Credit Cards for Startups
→TL;DR: Business credit cards are a surprisingly underutilized source of financing for startups and new small businesses but have a lot of advantages.
When we think of financing, we most often think of “debt financing,” or receiving cash in some way that creates a debt to be repaid. But as a startup business owner looking for sources of finance for a new business, wouldn’t it be nice to begin that journey without taking on debt?
Fortunately, there are several debt-free options to generate startup funding that every small business owner should at least consider:
Who knows you better than the people closest to you—your friends and family? Chances are you’ve already shared with them at length about your business plans, and one or a few of these individuals may be eager to help if asked.
Of course, asking friends or family members to lay out money for your business does come with some downsides, Before pursuing this option, take the time to put into writing the terms of any agreement you make. This will help to avoid any conflicts or mismanaged expectations over time.
Have you considered how much of your own personal savings you’re willing to invest in your own business? If you are confident enough in your new business venture to seek funding from strangers, step up and show that confidence by investing some of your own personal savings in the startup. After all, if you’re not willing to take a chance on you, why should anyone else be?
Plus, if you’re anticipating applying for an SBA loan at some point, definitely consider this route. The SBA likes to see that a business owner has invested personally in their business—it usually correlates with things going well when the owner has a significant personal stake in its success.
By taking advantage of a crowdfunding platform like Kickstarter, IndieGoGo, iFundWomen, or others, you might be able to fund your business by asking a large number of individuals to get involved with funding your startup through small investments.
Setting up a crowdfunding campaign is also a great way to gain exposure for your young business while you’re seeking funds for the venture.
Fair warning, however—crowdfunding does not normally generate large sums of capital, and maintaining a campaign can be time consuming. Before you pursue this option, consider whether the opportunities for exposure will be worthwhile even if the campaign doesn’t fully fund your business.
Often considered the closest thing to “free money” that you could ever obtain for your business, grants for small business are a form of startup funding that require no repayment and no trade of equity.
Although hard to find, small business grants are usually worth seeking out as a source of financing for a new business. They tend to be very industry-specific, so you’ll need to carefully research your business circumstances and identify your niche so that you can tailor your grant application to align with the grant sponsor’s goals. But there’s likely something that applies directly to you—from small business grants for women to small business grants for minority business owners, and more.
There are some advantages to working with investors to gain “equity funding” for your startup business. Obviously, the biggest one is that no debt is created. Investments can be tailored to exactly what the business requires, so it offers more flexibility for the developing business’s changing needs.
Of course, the cost of this low-risk, debt-free funding option is giving away a significant stake in the long-term ownership and control of your business. So, before you consider working with investors as a source of financing, think carefully about what concessions you’re willing to make and how involved you want that investor to be in steering the business direction and philosophy.
→TL;DR: You have good options for financing your new business without taking on debt—but they’re going to require putting in extra work, developing relationships, and potentially testing bonds.
Now that you’ve seen a wide variety of options available for financing your small business startup, it’s critical that you carefully consider the pros and cons of each option before committing.
And these options all offer different ranges of access to capital:
Armed with a thorough knowledge of your business plan and the direction you want it to take, the task to find startup funding won’t be as intimidating as you might think.