How to Fund Your Business Idea

Business credit cards, investors and your own wallet may be options for early-stage capital.

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Few things are more exciting than coming up with a business idea you believe in. But bringing that idea to life typically requires an investment — and funding a business can be tricky for entrepreneurs without a financial history or full-fledged product.

A traditional small-business loan likely won’t be possible until you’ve been up and running for a few months, at least. Still, you can turn to other sources to invest in your idea while your business gets off the ground, including friends, family, professional investors and your own bank account.

Here’s how to decide which funding options make sense for you.

Types of business funding

In general, there are two types of business funding:

  • Debt financing: You borrow money and promise to pay it back with interest, regardless of how successful your business becomes.

  • Zero-debt financing: You use savings or give someone something nonmonetary in exchange for an investment, like equity in your company or a custom piece of merchandise.

At the idea stage, zero-debt options are typically the better choice. This type of funding can be easier to qualify for if you have limited business experience, and you’ll avoid taking on debt that you may not be able to handle.

Debt financing may make sense once you have a detailed business plan that explains how you’ll earn enough revenue to pay back the amount borrowed. But try to avoid taking on debt until then.

Ways to fund your business without taking on debt

When your business is just starting out, your idea itself might be the most valuable asset you have. If you can convince others to believe in your idea too, they might be willing to invest in it without requiring you to pay them back. Here are some types of zero-debt funding.

Equity financing, including angel investment and venture capital

Equity financing gives the individuals or firms who are funding your business ownership 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 easier for aspiring entrepreneurs to secure — angel investors tend to be wealthy individuals, not investment firms, who focus on smaller investments. Venture capital firms, on the other hand, seek to invest in fast-growing startups that have the potential to be lucrative businesses.

With any type of investor, make sure to spell out the terms of any investment agreements in writing so all parties know what to expect and when.

Every investor will look for slightly different qualifications from the businesses they invest in. But just like with any other form of financing, you’ll probably need to demonstrate that your business plan is viable, your product or service fulfills a need in the market and- your team can deliver on the idea.

You may be able to connect with angel investors and venture capitalists through your local business incubator or startup accelerator. An online search for your city or region and "business incubator" should lead you to any such organizations in your region.

Self-funding

Entrepreneurs often have to dip into their own pockets to get started. Self-funding can help you avoid giving up control of your business to investors or paying interest on debts. On the other hand, if your business fails, you’ll lose your investment.

If you’re working a traditional full- or part-time job and starting a side hustle, consider remaining in your job as long as you can to shore up your personal financial security. Writing a business plan can help you come up with a strategy for growing your business to the point that it can support you.

Friends and family

Asking friends and family to invest in your business is a tried-and-true strategy for securing business funding. But mixing money and family matters can be dicey.

To preserve your relationships, treat your loved ones like any other investor. Share your business plan, answer their questions and be transparent about the risks. If they choose to invest in your idea, put your agreement in writing so everyone is on the same page. And if they choose not to, don’t take it personally — they need to look out for their own finances, too.

Crowdfunding

If your business idea is developed enough to have garnered a dedicated audience — for instance, if you’re a home baker seeking to expand into a storefront or an artist who wants to make a certain piece of work — crowdfunding might be an option for you.

In general, there are three types of crowdfunding:

  • Rewards-based crowdfunding: Supporters donate to your business and receive a token of your appreciation — like a piece of merchandise or exclusive access to an event — in return. Kickstarter and Indiegogo are platforms that support rewards-based crowdfunding.

  • Equity crowdfunding: Supporters receive equity in your company in anticipation of future returns. Wefunder is a platform that supports these kinds of campaigns, though investors may look for more established businesses.

  • Debt-based crowdfunding: Supporters essentially give you a loan, which you pay back on a prescribed schedule with interest or another kind of fee. Mainvest is one platform that offers these kinds of deals; though again, investors might lean toward more established businesses.

Debt-based financing options for your business idea

If you have a clear vision for your product or service, your business model and your market, taking on some debt can help accelerate your growth. You can generally spend debt-based financing as you see fit. Just make sure you’re prepared to pay it back on your lender’s schedule — because you may face late fees, liens or a lower credit score if you don’t.

Business credit cards

Depending on how much startup funding you need, a business credit card may provide enough financing to get your business up and running. Your credit limit will depend on how creditworthy the card issuer thinks you are, but several thousand dollars might be enough to create a product prototype or cover your business expenses while you secure your first few clients.

You can typically qualify for a business credit card if you have good or excellent credit (a FICO score of at least 690) and know your business structure; choosing a sole proprietorship works if you don’t have a formal structure yet.

Some business credit cards offer an introductory period with 0% APR, which allows you to carry a balance on the card for several months without accruing interest. Once that APR kicks in, though, it can be very high — above 20% in some cases. Make sure you have a plan to generate enough revenue to make those payments when the bill comes due.

Microloans

The U.S. Small Business Administration offers SBA microloans of up to $50,000 to all kinds of businesses, including startups. The program is designed for businesses traditionally underserved by lenders, which can make microloans easier to qualify for than other types of business loans.

Lots of nonprofit microlenders also make small loans to startup businesses. Like SBA microlenders, these mission-driven organizations often have less stringent application requirements than banks or online lenders.

Personal loans

You can use a personal loan for pretty much anything you need capital for, including your business. Since you are personally responsible for the debt, lenders only 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. It can also be risky to commingle your personal and business finances.

In general, personal loans for businesses are similar in size to microloans: You may be able to borrow up to $50,000. However, APRs can vary widely — from as low as 5% to as much as 35%.

Funding your business’s growth

After a year or two in business, you’ll have access to some larger financing options that can help your business expand.

Business loans

Small-business term loans aren’t usually a good fit for startups, but they can help your business expand once it’s established. In general, you’ll need at least two years in business to qualify for the lowest interest rates and most favorable terms from banks, along with good personal credit and collateral.

Some online business loans have less stringent requirements, but typically still require at least a year in business.

Business lines of credit

Business lines of credit are similar to business credit cards. A line of credit gives you access to a set amount of funding, and you can spend as needed up to the limit. Once you repay what you withdraw, you can borrow funds up to your credit limit again.

If you work with an online lender, you may be able to qualify for a business line of credit with as little as six months in business.

A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.