Big ideas don't prosper on their own. If you want to build a startup that stands the test of time, you'll need more than a smart idea and a solid work ethic: you will also need adequate funding. Whether you're hoping to be the next YouTube or buy a food truck, this guide offers insider tips on financing that can help you get your startup up and running.
Expert Advice on Crowdfunding, Angel Investing and Traditional Loans
Funding Your Startup
Updated: September 20, 2024
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Bootstrapping Your Startup Through Alternative Funding
Alternative funding options run the gamut, from tapping into your own savings to getting help from angel investors. Contrary to popular belief, less than 1% of startups receive venture capital funding, at least in their earliest stages.
Here are some of the alternative funding sources to consider as you look for ways to get your idea off the ground.
Step One: Look for the Low-Hanging Fruit
For alternative funding sources, you may first want to turn to friends and family — or even yourself.
Personal Savings
If you have enough funds in your savings account, you can use it to fund your own business pursuits. The benefit of this strategy is that you won't have to take out a loan. However, if your business fails, you can expect your financial investment to disappear along with it.
Business Credit Cards
If you can't qualify for a traditional business loan, a business credit card is a smart alternative. With a business credit card, you can secure your own flexible microloan. You will, however, need to personally guarantee repayment and pay high interest rates. "I absolutely recommend that you get a business credit card instead of using your personal card, because it clearly delineates your business expenses versus personal expenses," said David Ehrenberg, founder and CEO of Early Growth Financial Services, a San Jose-based company that provides financial services and assistance to private venture-backed startups.
Family and Friends
With business loans hard to secure, funding from family and friends is often more readily available. If your loved ones believe in your business venture, they might be willing to loan you the funds you require. Just make sure to get your agreement and repayment plan in writing.
Stage Two: Expand Your Circle
If you're unable to draw on personal savings and your immediate network, you may need to look into some innovative ways to get started. Here are a few ways to secure funding outside of traditional loans:
Grants
Some small businesses are eligible for grants available through organizations like the Small Business Administration (SBA), although requirements can be strenuous. The SBA's grant search tool can connect you with options that might work for your startup.
Peer-to-Peer Lending
Peer-to-peer lending firms like Lending Club and Prosper have become increasingly popular for business owners and aspiring entrepreneurs who cannot secure funding elsewhere. With this type of borrowing, your lender is comprised of individual investors who fund your loan. You may be able to qualify with bad credit, but you'll get a better interest rate and loan terms if your credit is better than average.
Microloans
Whether offered through the SBA, a private local lender or a government program, microloans can provide you with the rush of funding you need for various stages of business growth. While microloans are generally for less than $50,000, they can serve as a lifeline for your business if secured at the right time.
Crowdfunding
Crowdfunding websites like Kickstarter and Fundable are helping business owners and startups get off the ground all over the nation. While nearly anyone can apply for funding through one of these methods, a solid history is generally required to receive meaningful amounts of funding. Remember that anyone can throw up a GoFundMe page; if you truly want to get started through crowdfunding, you need a solid business plan to share.
Stage Three: Getting into the Big Leagues
When it comes to securing a large amount of money through an alternative funding source, there are times when it can pay off to step up your game. With any of the funding strategies below, you'll need to create an airtight business plan, have a step-by-step growth process in place and perfect your elevator pitch. As you pursue these options, you may often hear "no." But remember, you only need to hear "yes" once.
Incubators and Accelerators
Both incubators and accelerators offer opportunities and funding options for aspiring entrepreneurs. By and large, incubators provide funding for new and disruptive ideas, whereas accelerators provide funding for existing startups and small businesses. Both incubators and accelerators tend to be extremely selective, which means you should have your proverbial ducks in a row before you apply.
Angel Investing
Angel investors are people who invest their own money into a startup or business idea with the goal of extracting profit. To find an angel investor, you can reach out to your local network or join an angel investing network like AngelList. "There are also super angels, who are folks that invest heavily in early stage companies," Ehrenberg said.
Private Equity
Private equity is similar to angel investing in that it uses private funds, except that it pools together funds from several investors to spread out risk and increase buying power. Private equity investment firms can be found the same way as other types of big league investors — through networking and online platforms. Before meeting with a private equity firm, perfect your pitch much like those who have shared their business ideas on the popular network show "Shark Tank."
Venture Capital
A form of private equity, venture capital is a type of funding provided to new and unproven businesses thought to have high potential. Like angel investors, venture capitalists can be found through networking or through portals like Funding Post. "We've seen a new crop of investors that are micro venture capitalists," Ehrenberg said. "They typically have a fund that is anywhere from 5 to 50 million, and they tend to do quite a bit of investing at the seed level." Once you connect with a venture capitalist, you'll want to make sure your business plan and elevator pitch are pitch-perfect, leaving little room for doubt in your investor's mind. VCs typically require a seat on the company's board.
Loan Options for Serious Startups
Banks are generally wary of lending to individuals and new businesses that haven't proven themselves in the marketplace. However, there are loans out there for startups, notably the ones backed by the U.S. Small Business Administration (SBA). Here's what they are and how they work:
1
7(a) Loan Program
The SBA's most popular loan program, the 7(a) loan program, has a maximum loan amount of $5.5 million in funding from local lenders, with the average in 2018 being $425,500. With this program, the SBA isn't lending you the money; your bank is. The SBA simply acts as an intermediary and provides a guarantee of repayment if you default. Here are some more details on this program:
- 7(a) Loans are most commonly used for working capital to keep a business running, but they can also be used for equipment and asset purchases or improvements.
- The SBA can guarantee as much as 85% on loans of up to $150,000 and 75% on loans of more than $150,000.
- Anyone with an ownership stake of at least 20% is required to personally guarantee a 7(a) loan.
- SBA loans like the 7(a) loan program are targeted at small firms and startups with less than $7 million net worth and less than $2.5 million in net income.
2
504 Loan Program
The 504 loan program was created to help small businesses and startups fund their land or equipment needs, and loan amounts are based on what goals they support. While your loan is funded by a bank in your area, the SBA guarantees 40% of the assets you purchase for up to $5 million for job creation and public policy goals and up to $5.5 million for small manufacturing. Generally speaking, 504 loans require a contribution of up to 10% equity by the borrower and the project assets being financed are used as collateral. In addition:
- The 504 loan program helps the lender reduce exposure by allowing the SBA to guarantee the loan.
- Applicants for the 504 loan program must have less than $15 million in net worth and net income less than $5 million after taxes for the preceding two years.
- Borrowers must personally guarantee each loan, putting their personal credit on the line in case of default.
3
7(m) Microloan
Created solely for startups, the 7(m) microloan program provides up to $50,000 in funding to grow or start a business. Instead of a loan from a traditional bank, however, the 7(m) microloan program uses funding directly from the SBA. Here are some additional details:
- Although 7(m) microloans are built with funds from the SBA, they are administered by community-based nonprofits.
- The average microloan offered is $14,735, and loan amounts are capped at $50,000.
- A microloan usually requires collateral and a personal guarantee.
Debt Financing Versus Equity Financing
Debt financing involves taking on debt to grow your business, while equity financing involves giving investors a stake in your business with the expectation that you'll make them money when your business becomes successful.
"Debt financing is usually preferable because when you do equity financing, you are giving up (some) ownership in the company, and that's almost always more expensive than debt," Ehrenberg said.
Debt financing, however, can be hard to achieve until you have real assets on your balance sheet. "So unless you have revenue, unless you have accounts receivable, or fixed assets that are really worth something, it's really hard to get debt financing," Ehrenberg said.
Equity financing, on the other hand, has its own problems.
"You really need to be going after a large market opportunity, and you need to have the ability to really get a lot of traction in that marketplace," Ehrenberg said. "And — fortunately or unfortunately — equity markets can be very fickle. Something can be really hot today and not so hot tomorrow. Eight years ago clean technology was huge, five years ago social media was huge, today augmented and virtual reality and AI are big. That's one of the drawbacks of equity — what's hot can change very quickly."
Expert Q&A
- How do I know how much capital I need?
- What are some creative ways for someone to finance their business?
- What's the likelihood of being chosen for a small business loan as a startup, and how can I make myself and my business a good candidate for a loan?
- How do you meet an angel investor or a venture capitalist? Other interested partners?
- What about peer-to-peer lending?
- How should you prepare to talk with venture capitalists?
- Is the elevator pitch really that important?
- How fast can my startup safely grow?
Ye CaiAssociate Professor of Finance at the Leavey School of Business, Santa Clara University
Liz WolfeBusiness Coach at Liz Wolfe Coaching
Kevin Cox, Ph.D., MSEDirector at Florida Atlantic University Adams Center for Entrepreneurship
Judy HerbstExecutive Director at Savvy Ladies
Bruce BachenheimerClinical Professor of Management at Pace University
Abram Walton, Ph.D. Professor and Executive Director at the Center for Innovation Management and Business Analytics at Florida Tech and Founder of Ivory Bridge Group
May Jiang, CFPFounder of Beyond Profit and Wealth Consulting
Precious WilliamsInternational Speaker and Best-Selling Author, Board Director at Savvy Ladies
Chad O'ConnorAdjunct Faculty, DMSB and CPS at Northeastern University
Joseph R. StasioAssociate Professor, Marketing at Merrimack College
Erick Chang, PhDAssociate Professor of Management at Arkansas State University
Joe Roberts, Ph.D.Director, Center for Innovation and Professional Development at Webster University
Julie Gauderman, DNAPAssociate Director, Nurse Anesthesia at Saint Mary's University of Minnesota
Amy Rose HerrickChartered Financial Consultant at The Secret Profits
Alex Denoble, PhDProfessor of Lavin Entrepreneurship Center at San Diego State University
Dr. Hung-bin DingProfessor of Management and Associate Dean-Academics at Loyola University, Maryland
Walter MswakaAssociate Professor of Social Entrepreneurship at Rollins College
David J. HansenAssociate Professor of Entrepreneurship at College of Charleston
Paula Danskin EnglisProfessor of Management and Academic Director, Entrepreneurship Program at Berry College
Moshe BellowsManaging Principal of Maccabee Ventures
Gregory StollerSenior Lecturer at Boston University Questrom School of Business
Pyayt OoAssistant Professor of Management at the University of Texas at Arlington
Kasem Rodriguez MohsenFounding Partner, Equilibrium Impact Ventures
Tommy WhiteSenior Professorial Lecturer at the Kogod School of Business at American University and the Director of the AU Center for Innovation
David S. "Steve" HeesackerBusiness Instructor at Central Carolina Community College
Jae Hyeung KangAssociate Professor of Entrepreneurship at the Oakland University
Jeff CornwallProfessor of Entrepreneurship and Serial Entrepreneur at Belmont University
Peter Zaleski, Ph.D.Professor of Economics at Villanova University
Mark T. SchenkelAssociate Editor at Journal of Small Business Management and Professor of Entrepreneurship at Jack C. Massey College of Business
Fran PastoreCEO and Founder of the Women’s Business Development Council
David EhrenbergFounder & CEO at Early Growth Financial Services
William KeenanCEO at Pango Financial
Funding Resources for Startups
- 7(a) Small Business Loans: Read more about the SBA's most popular loan program for startups and small businesses.
- AngelList: This online business portal connects entrepreneurs and small business owners with investors who are looking for profitable business opportunities to invest in.
- Fundable: Fundable is a newer startup aimed at helping entrepreneurs secure the small business funding they need.
- Small Business Grant Programs: Learn whether your small business or startup qualifies for a government grant that could help your business grow.
- Grants.gov: This government portal provides details on a wide range of grants available to small businesses, startups, and existing organizations.
- Grants and Loans for Minorities: The Minority Business Development Agency (MBDA) offers a unique resource on the various grants and loans available to minority business owners and entrepreneurs.
- Loans and Grants: The Small Business Administration (SBA) offers considerable detail on an array of loans and grants available to both small businesses and startups.
- Microventures: As a small business funding source, Microventures has successfully raised over $85 million for successful startups like Facebook.
About Mary Purcell
Mary Purcell is a freelance writer and health and finance researcher in Piedmont, Calif., with expertise in policy analysis. She is fluent in Spanish and has a master's degree in Latin American studies from Georgetown University. Her articles have appeared on LimeHealth, Narrative, Consumer Health Interactive, and other outlets.
sources
- U.S. Small Business Administration. "7(a) loan program." Accessed November 15, 2019.
- U.S. Small Business Administration. "504 Loans." Accessed November 15, 2019.
- U.S. Small Business Administration. "Microloan Program." Accessed May 11, 2023.