If you’re a born entrepreneur, there’s little more exciting than hitting upon a business idea that you know you can spring from your imagination and into the real world. Of course, just like full-fledged operations, business ideas need capital to thrive. The next step is to use that momentum to figure out how to get funding for a business idea.
This, of course, can be easier said than done. Without a financial history, where are you supposed to find funding for a business idea? If you approach your bank for a business loan, you’re likely to find a closed door. That said, when your business idea needs funding you do have quite a few non-bank options to consider.
Some of these financing methods are easier to qualify for than others. Some require more time and planning to secure. And some may simply not provide you with the financing solution your future business really needs. Ultimately, choosing your business’s initial funding solution is entirely at your discretion.
But before you embark on that decision, you need to be armed with the facts. Here, we’ll go over a few of the most common and accessible ways to fund a business idea.
As we’re talking about how to get funding for a business idea, we’re going to focus on two categories: debt-based financing and zero-debt financing.
Debt-based financing is probably what first comes to mind at the mention of a small business loan: It’s when a business receives a certain amount of money with the promise of repaying that amount, plus interest, to the lender (hence, the creation of debt). Obviously, lenders, either banks or online lenders, are taking a risk every time they extend a loan. After all, debt-based loans are contingent upon the borrower—or, the business—being financially solvent enough to repay the debt they owe.
In order to feel secure extending debt-based loans, most lenders require several years’ worth of a business’s financial history in their business loan applications. Some of those common business loan requirements include evidence of positive cash flow, profitability, a long credit history, and good personal and business credit scores.
But business ideas, of course, simply don’t have the financial evidence those lenders want to see.
So, going the zero-debt financing route is likely the first course of action for the newest businesses—or at least one you might consider. Rather than securing financing through the creation of debt, startups in need of capital can look toward their family and friends, the general public, their own assets, or individual investors seeking a share in the company’s profits in return for their money.
That said, it’s not impossible to fund a business idea with a loan. Startup loans just won’t look exactly like the traditional term loans you might be expecting, because they won’t necessarily involve the same application requirements. That means they’ll be a little easier for new businesses to qualify for. We’ll get into all of this more.
Zero-debt financing encompasses a few different financing methods—none of which, of course, involve a business owing money to a lender. These methods also require approval on a business loan application, which is a really good thing for business ideas (or, not-yet businesses). Here are a few options:
Equity financing allows individuals or firms who are funding your business ownership stake in return for capital. Angel investing and venture capital are probably the two best-known methods of equity financing for startups. The former is generally more accessible to brand-new business ideas. Angel investors tend to be individuals focusing on earlier investments of smaller sums.
For aspiring entrepreneurs, angel investors truly live up to their divine nicknames. These wealthy individuals, many of whom are already successful business owners, offer cash upfront to help very new businesses get off the ground. Angels can also provide an equally valuable resource for new business owners: Guidance and expertise.
But just like with any other form of financing, you’ll need to prove that your business plan is viable, your product or service fulfills a need in the market, and that, through your fiscal responsibility and business acumen, your venture will become lucrative.
So, you’ll certainly need to have an operating business plan in place before approaching potential angel investors (more on that later). But sometimes, you’ll also want to collect additional data, proving your business’s viability, to bring to the investors’ table.
This was the case for Aaron White, CEO of Script:
When I first created my company, I was working full-time at a school as an IT Director. Luckily, I was able to partner with my school to pilot my product and pivot with my cofounder as we gathered data. After a year of building out our product, we had enough data to speak with local angels in the Tampa Bay community. Thanks to introductions from organizations such as the Tampa Bay Wave, our local non-profit incubator, we were able to meet angels who funded our first round of financing to help us grow.
Tom Gatzen, cofounder of UK-based flatshare site Ideal Flatmate, says:
Our initial funding came from a range of angel investors. We reached out to people within our extended network—and pretty much anyone we thought would be interested in our idea. As a result, over 20 people ended up investing in our seed round.
One of the advantages of angel investors is that they don’t just disappear after they contribute to that seed round. As long as you’re using their initial funds responsibly, and showing evidence of real growth, then angels will continue to invest in your business. Ultimately, as shareholders, it’s in their best interest to see your business succeed.
Ideal Flatmate’s Gatzen continues:
We used that [seed] money to build a basic version of our site, so we were able to demonstrate to future investors that there was a large market of users interested in our idea. From there, we were able to build solid financial projections and create a business plan forecasting the next three to five years. We’ve just closed our second round of funding, and almost all of the funding came as follow-up investments from our initial investors.
Thanks to sites like Kickstarter, Indiegogo, GoFundMe, and more, crowdfunding is becoming an increasingly popular method for entrepreneurs (or anyone else, for that matter), to raise at least a portion of their seed money. Basically, funders give because they believe in your project or venture—that’s it. And since raising money through a crowdfunding site has the potential to reach thousands of people, it’s a built-in marketing method, too.
When you’re serious about turning your idea into an operating business, you’ll likely turn to those closest to you to pitch in some cash before anything else. That makes a lot of sense: You’re probably leaning on them for emotional support throughout this endeavor—and, assuming they want you to succeed, they’ll be excited to offer you financial support, too.
But, as is always the case when you’re mixing your personal life with your professional life, proceed with caution. Make sure your business plan is airtight before tapping your loved ones for loans or equity, lest you find yourself responsible for losses you may have been able to prevent.
And to truly protect everyone involved (and avoid potential rifts), detail the terms of your agreement in writing, either with an attorney or not.
While you consider other forms of zero-debt financing, you should probably start planning on self-financing your business.
Of course, self-financing your business can feel like a huge leap of faith. But if you plan on securing thousands, if not millions, more from angels or venture capitalists down the line, you’ll need to show these individuals or firms that you have “skin in the game.” If you don’t believe in your business enough to put your own capital on the line, then a stranger certainly won’t risk theirs.
There are a few ways to access the funds you’ll need to self-finance your business, like drawing from your retirement account, borrowing against your investments, or taking out a home equity loan. Or, if you’ve been an especially diligent saver, you may be able to simply contribute those savings toward your business venture.
Stacy Caprio, owner of Deals Scoop, says:
I used my own savings from my 9 to 5 job to initially fund my business. It was freeing to use my own money, since I didn’t need to relinquish business control to VCs or beg my friends and family for cash.
Your personal-turned-startup capital can come from unlikely places, too. Ronna Moore, owner of Fairy Homes and Gardens in Savannah, Missouri, funded her successful online store through an unexpected resource: Her own physical store:
Originally, my ecommerce business was just meant to be an extension of my brick-and-mortar operation. But as time went on, I began to restructure my business plan and used revenue from my physical location to fund my ecommerce business. I found this the easiest way to ensure I had revenue coming in and could put money aside. I’ve now officially transitioned to ecommerce because of this funding model.
Borrowing against your nest egg, sacrificing your new-car money, or even pulling funds away from your current business to support a new one can feel risky. But there is some practical value in that fear: When you’re confident relinquishing a portion of your own money, you’ll know that your business idea is truly feasible.
So, how do you know which zero-debt financing route is best for you? Anders Thomsen, CEO of No-More in Copenhagen, Denmark, received funding for his startup through three different avenues. All of them have specific pros and cons, and every soon-to-be entrepreneur needs to weigh them out carefully. Thomsen says:
Friends and family is one of the best ways to find startup funding. It’s easy, and your friends and family are probably willing to invest in you because they genuinely want your idea to succeed. But if your idea doesn’t succeed, you may end up losing your loved ones’ hard-earned money, then have to live with the consequences.
Crowdfunding is another great funding option. You don’t have to give up equity, and you don’t need to worry about paying off a loan. However, it can be difficult to secure the amount of funding you really need.
Angel investors can provide large funding amounts, which you can use to grow your business quickly. Additionally, angels usually provide expert advice and help prevent mistakes common to new small business owners. On the downside, you’ll have to give up equity, and possibly some decision-making control.
As we mentioned earlier, if you go the zero-debt-based financing route, it’s unlikely that you’ll need to provide the business loan requirements that traditional lenders want to see, like Profit & Loss statements, business bank account statements, and other hard evidence of your business’s profitability.
But all of these lenders—including you!—will definitely need to be convinced of your business’s viability, and your seriousness as a small business owner.
“Regardless of which route you take to fund your business idea,” Thomsen suggests, “prepare a solid presentation that answers the questions your investors may have.” He recommends that you include the following in your pitch (at a bare minimum):
That might seem like a lot to prepare. But if you’re serious about your business idea, then you would have already finalized this material in your business plan.
Your business plan provides you, as the owner, with an actionable plan for building and growing your venture over the next three to five years. And lenders won’t feel comfortable funding your venture until they know exactly what they’re getting themselves (and their money) into.
→TL;DR (Too Long; Didn’t Read): The newest startups will have the most luck securing financing without incurring debt, because these methods don’t require tough business loan applications.
As Thomsen says, there are a few downsides to zero-debt funding methods. So, you might want to look into securing a small business loan to fund your business idea—either for any of the above reasons, or just to supplement whatever funds you’ve already gained by bootstrapping.
Debt-based options are limited for brand-new business ideas, but they do exist! You just need to find the business loan options that are accessible to businesses with limited (or no) financial history. These are three of your best choices:
Whether from traditional banks or online lenders, business loans are hard to come by for startups. After all, lenders take a big risk in extending business loans, which can extend into the millions of dollars for the most eligible borrowers working with the biggest banks.
So, lenders need to be certain that the borrower is capable of repaying those huge amounts. But if you’re new to the game, there’s no way of proving your business’s profitability and reliability. In that case, you can consider a personal loan for business.
Unlike business loans, which can only be used toward your business, you can use a personal loan for pretty much anything you need that capital for. That includes your startup. And since it’s you who’s responsible for the debt, and not your business, then your lender is only going to consider your personal financials and credit history on your application.
That personal responsibility can be a double-edged sword, though. If you default on a personal loan, your own assets are on the hook, so that’s a risk you’d need to be willing to take. In general, too, it can also be risky to commingle your personal and business’s financials. Depending on your business entity type, if your personal finances are mixed up with your business’s, you may become personally liable in case of a lawsuit. Or, at the very least, intermingling personal and business financials makes filing taxes really difficult.
Finally, personal loans can often be smaller than business loans, and they can come with hefty closing costs. So, definitely run through the pros and the cons before taking out a personal loan for business.
For many entrepreneurs, equipment (we’re talking trucks, ovens, computers, etc.) is necessary to make their business ideas operable. But that equipment is just as expensive as it is crucial to a certain type of small business’s success.
That’s where equipment financing comes into play. In addition to financing that important gear, equipment loans are especially viable financing methods for new businesses because they’re a little easier to qualify for than traditional term loans.
As you know by now, lenders are always looking to mitigate risk. For the most part, they only want to work with the borrowers whom they’re certain will repay their debt. But collateralized loans, like equipment financing, provide the lender with a built-in safety net.
With an equipment loan, the lender uses the equipment itself as collateral, which they’ll collect if their borrower fails to repay their loan. That seriously lessens the lender’s risk, so they’ll be a little more forgiving when considering the borrowers they’re comfortable working with. In fact, equipment lenders are just as concerned with the value of the equipment they’re funding as they are with a borrower’s personal creditworthiness and business history.
Do be aware, however, that borrowers with higher credit scores will receive better terms (i.e. lower interest rates) on their equipment loans than those with lower credit scores. So, although you’ll have an easier time funding your business idea with an equipment loan, it remains in your best interest to maintain the highest credit score possible.
If you want to fund a business idea with debt-based capital, your easiest option is to sign up for a business credit card. Using a business credit card is the easiest way to meet your day-to-day expenses, maintain that important separation between your personal and business finances, and even earn perks and rewards that enhance your business’s productivity.
Even the newest businesses have a shot at approval for a business credit card. If a business’s financial history is limited, then card issuers will simply evaluate the personal financial information provided on the business credit card application instead. Card issuers just need to know that you have ample enough funds to pay your monthly bills, regardless of whether that money comes from your business or another job entirely.
As you probably know from shopping around for your personal credit card, there are a ton of business credit cards on the market. All of these cards cater to different credit score ranges, business needs, and individual spending habits. But when you’re first starting out, it’s hard to know exactly what your business’s needs and habits actually are.
Start your search with the best business credit cards for new businesses. All these cards offer features and easily-accessible rewards that can help the newest businesses find their financial footing.
In particular, these are two of our favorite business credit cards for new businesses:
A 0% intro APR period business credit card works as an interest-free loan that lasts as long as the indicated intro APR period. So, you can purchase everything you need to turn your business idea into a reality, then take your time paying those expenses down without incurring interest costs.
At 12 months, the American Express Blue Business Plus Credit Card offers one of the most generous 0% intro APR periods for purchases on the market. After that intro period, a variable interest rate will set in with the market Prime Rate and your creditworthiness, so see the issuer’s terms and conditions for the latest APR information.
Every business is unique in their own way, but they’re pretty homogenous in at least one regard: They all need hard cash. That’s especially true of startups, who need flexible capital to build their businesses from the ground up. So, funding a business idea with a cash back business credit card makes a lot of sense. You get all the ease and flexibility of a credit card, but you’ll also end up with a surplus of cash that you can use however you see fit.
There are lots of cash-back business credit cards to investigate, but we like the Capital One Spark Cash for Business for its no-fuss, straightforward, flat-rate rewards structure: Every time you use this card, you’ll earn 2% cash back.
→TL;DR: Personal loans for business, equipment loans, and business credit cards are three of the most accessible debt-based financing options for the newest businesses with limited financial histories.
If you’re considering funding a business idea, your first thought may angle you toward your local bank. Although you’d be right to think that your bank offers pretty amazing loan products, in reality, you’ll have a tough time knocking down the requirements that stand between you and that huge loan amount (and tiny interest rate).
Other zero-debt financing options for startups include small business grants, startup accelerator programs, and business incubators.
These three debt-based financing solutions are a little-to-a-lot easier for new businesses to qualify for than traditional term loans.
Ultimately—as was the case with the small business owners we spoke to—you’re probably going to end up funding your business idea using a combination of these methods.
No matter what, take your time to research your funding options, and pursue the options that are truly possible for your business idea right now. And don’t rush into funding before the business idea is ready—with a complete and detailed business plan in hand, you’ll have the best shot at securing the best and biggest funding.