Startup Funding: What It Is and How to Get Capital for a Business

Startup funding can involve self-funding, investors and loans and may be sourced from banks, online lenders, people close to you or your own savings account.
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Startup funding, or startup capital, is money that an entrepreneur uses to launch a new business. The money can be used for hiring employees, renting space, buying inventory and other operating expenses that help a business get started.

Startup capital often comes in the form of self-funding, investors or small-business loans. Knowing your financing needs and business goals will help you choose the right type of startup funding for your business.

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How startup funding works

Securing startup funding can be challenging, especially if you’re hoping to go the traditional financing route. Although some banks will fund startups, the loans can be difficult to qualify for due to a startup’s limited time in business and revenue. In some cases, offering collateral to secure the funding can help in the approval process.

There are other startup funding options that exist outside of traditional lenders, such as online lenders, investors, grants and contributions of your own money.

In some cases, the type of funding you pick can affect the ownership of your startup. For example, small-business loans typically allow you to retain full ownership of your startup while getting funding from an investor may involve sharing equity and some control of your company.

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Many traditional lenders aren’t an option for startup funding because they require at least two years in business. However, there are some online or alternative lenders that offer more flexibility by requiring as little as six months in operation.

Types of startup business funding

The amount of funding and how quickly you need it can help determine which funding options are best for you. Here are some specific types of startup funding to consider.

1. SBA microloan

The U.S. Small Business Administration offers several loan programs, some of which cater specifically to startups. One such program is the SBA microloan, which can provide up to $50,000 for working capital, inventory, supplies, furniture, fixtures, machinery and equipment. Generally, the lenders offering SBA microloans will require some form of collateral and a personal guarantee.

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2. Microlenders

Private and nonprofit lenders also offer microloans to startups that may not qualify for a standard business loan. These lenders tend to support minority or traditionally underserved small businesses. Microloans usually come with favorable terms, and making payments on time can help you build your credit — which, in turn, can make it easier to obtain more financing in the future.

3. Online lenders

Online lenders are normally nonbank or alternative lenders, and they can be a viable option, especially if you are looking for fast funding. Online lenders usually offer more flexibility related to time in business and credit score. They typically require less paperwork than traditional lenders and often don’t ask for collateral to secure a loan. The trade-off is that your loan may come with higher interest rates and more fees.

Bluevine - Line of credit
OnDeck - Online term loan
Funding Circle - Online term loan
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4. Personal business loans

Personal business loans can be a solid option for those with strong personal finances. Loan amounts may be smaller and terms may be shorter than traditional business loans, but funding can be quick, within a week of approval, in some cases. And depending on your credit score, personal loans can have lower interest rates than other financing options. Just be sure that your lender will allow the loan funds to be used for business purposes.

5. Friends and family

If more traditional lenders aren't an option, family loans may help fund your startup. While these loans may come with little or no interest obligations, they can be costly if they begin to affect your personal relationships. Putting the loan terms in writing can help set clear expectations for both parties, as well as make sure everyone understands and accepts the risks involved.

6. Self-funding

If you have enough personal savings, you may choose to self-fund, or bootstrap, your startup. This may include funding your startup with your own cash or with your retirement savings like Rollovers as Business Start-ups (ROBS) transactions. Self-funding can help you retain full control of your company, unlike with investor funding, and avoid paying interest as is the case with loans. However, a downside of self-funding is the possibility of losing your savings if your business fails.

7. Venture capital

Venture capitalists, which are primarily investment firms, tend to only offer funding to high-growth companies, because of the significant risk involved. If the startup doesn’t succeed, investors won’t see a return on their investment. In addition to the equity they’ve purchased, venture capitalists often want, at minimum, a seat on the board of directors of any company they’re financing.

8. Angel investors

Angel investors, often wealthy individuals, want to invest in a new business because they believe it has potential. This form of startup funding doesn’t involve monthly payments; however, it will likely require you to give up partial ownership of your company. Also, some angel investors may want to take an active role in the decision-making process if they fund your business idea, while others may take a more hands-off approach.

9. Small-business grants

Startup business grants can be hard to get because competition is high. However, if you can secure a grant, you’re looking at free money for your startup. You don’t need to pay grants back or pay interest on them like you would a loan and you typically won’t need to share ownership, as is often the case with an investor. If you are a member of an underserved group, you may want to look into small-business grants for women, business grants for veterans or grants for minority entrepreneurs.

10. Crowdfunding

Crowdfunding allows entrepreneurs to raise money for their businesses through online campaigns and social networks. To incentivize donations, gifts, rewards and free products can be offered to those who donate to your business startup campaign. Another option is equity crowdfunding, where investors receive actual equity in your business in exchange for their cash contributions.

11. Business credit cards

Financing your startup with a credit card can be an option when you haven’t been able to secure cash through other means. When used responsibly, business credit cards can provide short-term financing for key purchases and expenses. A 0% introductory APR credit card can be especially useful if you have a plan to pay off your balance before the introductory offer expires and higher interest rates are applied to your remaining balance. Also, business credit cards are often preferable over personal credit cards because they can offer higher credit limits and business-specific rewards.

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How to fund a startup

Though the process of securing funding for your business will vary, here are five basic steps you can take to fund your startup:

  1. Identify how much funding you need. Calculate how much money you need before you start submitting applications or reaching out to your network. If you want to finance a large, one-time purchase, a business credit card might be the right move. Or, if you need to purchase machinery, an equipment loan may be a good option. If you’re looking for substantial capital, an investor might make more sense.

  2. Write a business plan. Many lenders and potential investors will require a business plan. This document outlining your business model, funding needs and plan to turn a profit can help persuade others that giving you money is a smart decision.

  3. Compile key documents. Lenders typically want to see business and personal tax returns, bank statements, profit and loss statements and other business financial documents, as well as any legal documents relating to your business such as articles of incorporation, commercial leases and contracts.

  4. Decide which type of funding is right for you. Do your research to make sure you understand which type of funding is best for your business and then target your applications accordingly. You may also want to consider an alternative option if your first choice for funding doesn’t work out.

  5. Make sure you can pay it back. Map out a plan for how you’re going to repay any money you borrow before you borrow it. Using a business loan calculator or credit card payoff calculator can help you estimate your payments and ensure the repayment amounts fit into your monthly budget.

Frequently asked questions

Startups can get funding in different ways, including business loans, personal savings, friends and family, venture capital and startup grants.

The best type of startup funding depends largely on the type of business, funding amount and the business owner’s general financial situation. If you don’t have the option to fund your business personally or through family and can’t qualify for a traditional bank loan, an online lender can be a quick alternative.

This will depend on your type of business. A restaurant, for example, is an inventory-heavy business that requires equipment and property or rental space to operate. The startup costs for a small restaurant can range anywhere from $175,000 to over $750,000. Conversely, an online consulting business could start operating from a business owner’s home for the cost of a website, a phone and a computer.