How to Get Funding For a Business

Written by Katie Ziraldo +1 more

Edited by Dawn Daniels

Whether you’re just starting out or looking to expand, there are many ways to finance a business venture. The form of funding you choose can have a lasting impact on your business, so it’s important to consider your options carefully. Let’s get into them.

1. Business loans

One of the most common ways to fund a business is through a small business loan. Business loans are a type of debt-based financing, meaning the money you borrow must be repaid with interest. There are multiple types of business loans, including:

To qualify for a business loan, you’ll need to meet certain criteria, including minimum credit score, time in business and annual revenue requirements. The specific criteria you need to meet will depend on the lender, so you may need to do some research to compare your options.

While traditional lenders may have strict eligibility requirements, alternative lenders may be more willing to provide financing for startups and low credit borrowers.

Regardless of the lender or loan type you choose, a business loan could be a good option if you’re confident in your ability to repay your debt.

2. Bootstrapping

If you want to avoid taking on debt to open your doors, you can also consider bootstrapping, which refers to using your own finances to fund a business. This might include your personal savings or money borrowed from friends and family.

While bootstrapping can be an attractive option, as it allows you to stay out of debt, you’ll likely need to have substantial savings for this method to be effective. Many bootstrappers rely on income from another job while they work to get their business up and running. This can be time consuming and may delay the process of starting your business. It’s also important to note that bootstrapping can be risky, as you risk losing your hard-earned savings if the business fails.

Still, bootstrapping may be a good choice for small business owners with a solid financial foundation to fall back on.

3. ROBS

A “Rollover as Business Startup” (ROBS) is a 401(k) transaction that allows business owners to invest funds from their retirement account into their business without paying taxes or being penalized for using the funds early. Like bootstrapping, this option might allow you to obtain the financing you need for your business without acquiring extra debt.

However, ROBS are only an option for C corporations. This is because ROBS work by allowing you to use your retirement savings to buy stock in your new company, then using the money earned through the stock purchase to cover your business expenses. To have the ability to sell stock, your business will need to be a C-corp, which will require you to file articles of incorporation and take steps to remain compliant with government regulations.

In addition to C-corps being more complicated to establish and maintain, ROBS can be a risky investment, as you could lose your retirement savings if the business does poorly. However, if you’re already planning to establish a C-corp, this could be an option worth exploring.

4. Equipment financing

Equipment financing provides funds to purchase equipment like manufacturing machinery or a new delivery car. Because the equipment serves as collateral on the loan, some equipment lenders may be willing to work with startups, especially if you have good credit. However, not all lenders will work with early-stage businesses, so you may need to look at multiple lenders to find the right match.

Equipment financing could be a good option if you need expensive equipment to operate your business. Like business loans, equipment loans are typically repaid in monthly installments, with short- and long-term options available. Because this can be a startup-friendly option, new business owners may choose to combine an equipment loan with bootstrapping and other forms of financing to get their business off the ground. Just keep in mind that you’ll be responsible for the cost of maintaining the equipment, which could become outdated or obsolete with time.

5. Personal loans

If your business is too new to qualify for business financing, you may find it easier to fund your business with a personal loan. Personal loans base your eligibility on your personal financial situation, including your income and credit history.

However, unless you have a high credit score, you could end up paying hefty amounts of interest. This is because personal loans typically come with higher interest rates and lower loan amounts than their business counterparts. And like any debt-based financing, there are also risks involved — if you’re unable to repay a personal loan, you will be held personally responsible.

6. Venture capital

New businesses can also seek out investors for financial backing. Venture capital (VC) is a form of financing in which investors provide funding in return for partial ownership of the business. This can be an attractive option for startup companies, as high-risk businesses with fast growth potential tend to appeal to venture capitalists.

But venture capital isn’t only for startups. In addition to early-stage financing, which helps startups develop and launch a product, late-stage VC financing helps business owners optimize and expand their operations.

However, while venture capital can be appealing, it can also be difficult to obtain, as you’ll need to demonstrate your business’ potential to attract investors. This type of funding also requires you to give up a percentage of your business, which could cause friction if you and your investors disagree on how to run the business.

7. Take on a partner

A business partnership can breathe new life into your business in more ways than one. In addition to bringing in extra capital, your new partner may also open doors to new clients and fresh ideas, potentially allowing your business to turn a profit sooner than if you were going it alone. Having a partner means you will also be able to share your ownership responsibilities, which may be appealing if you plan to work another job until your business is fully up and running.

However, like many of the other funding options on this list, there are risks. It’s important to make sure you and your potential partner agree on how the partnership will be structured and how the business will be managed. Otherwise, you could end up with different visions, which could make it difficult to work effectively together.

8. Crowdfunding

Crowdfunding is yet another way to raise funds for your business without taking on debt. As the name implies, crowdfunding refers to raising money for your business using donations from friends, family and the general public. Popular crowdfunding platforms like Fundable and Kickstarter can help with this, though each platform has its niche, so you’ll want to find the platform that best fits your needs. You’ll also need to make sure you understand the platform’s policies and fee structure.

Crowdfunding may make sense for your business if you have a strong social media following and particularly marketable business idea. However, you’ll need to be willing to wait for your financing, as crowdfunding campaigns last an average of six to nine months. If your financing needs are urgent, this is probably not your best option — though you could consider using crowdfunding to supplement another option on this list.

9. Small business grants

Small business grants offer free money to businesses, which makes them very appealing, but also quite competitive. Business grants from the federal government can be found through programs like the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR), as well as on the government website grants.gov.

In addition to government grants, corporate entities also offer small business grant programs. Some grants are specifically designed for certain demographics, such as grants for women or minorities. This means that the specific criteria you need to meet to qualify for a grant will depend on the program. For the best odds, check that you meet the basic requirements before you apply and keep an eye out for any opportunities to make your application stand out from the competition.

Keep in mind that a lot of grants are small and aren’t intended to be the only way to finance a business — if you’re able to qualify for a smaller grant, you can use it alongside other funding options, like loans or savings.

10. Small business credit cards

Small business credit cards can be a useful way to keep business and personal costs separate, which may be particularly helpful come tax season. Business credit cards are typically easier to obtain than business loans, especially if your personal credit score is high. However, credit card interest rates are often higher than other forms of financing, so you’ll need to use your card responsibly to avoid unnecessary costs. A common best practice is to pay off your statement in full each month.

As you compare business credit cards, pay attention to rewards categories, sign-up bonuses and introductory offers to find the card that best aligns with your needs. Keep in mind that these cards aren’t meant to be a substitute for a loan — they’re better used to cover ongoing expenses, and you may need to combine this with other funding sources to start a business.

But if your scale of operations is small, a business credit card might be enough to help you get started. For example, if you’re a sole proprietor running a small online shop, a business credit card might be able to provide the basic funding you need to buy supplies and stock up on inventory.

How to decide how much funding you need

To determine how much funding you need for your business, you’ll need to take stock of your situation. What needs to happen to achieve your business goals? Are you planning on buying real estate? Investing in new machinery? Expanding your business with new hires?

The SBA states that most businesses can be broken down into three types: brick-and-mortar businesses, online businesses and service providers. The expenses you can expect to pay will depend on your business type. For example, brick-and-mortar business owners will need to prioritize buying or renting a physical space, while online business owners may choose to spend more on website and social media marketing.

To calculate your business costs, start by making a list of expenses, then estimate how much each expense will cost, noting whether it is a one-time cost or a monthly bill. Some expenses may have clearer costs than others. When in doubt, researching your competitors can be a good way to see what similar companies pay for their business expenses.

Once you have an estimate for each item on your list, add them together to get an idea of the business financing you need and when you need it.

Documents you’ll need

Once you decide how much you need, it’s time to find funding sources. When you’re looking for funding, investors or lenders will likely want to see the following information: