Want to build a business from scratch? There is an infinite number of things to consider. But the essential thing to build a business is startup financing. No business startup can grow without a safe and decent amount of funding. In this article, we did the hard work so you won’t have to and listed out the 10 best financing options to turn your startup into your dream company.
What Types of Financing are Available to Small Businesses?
Small businesses differ from high-scale startups in their targeted growth and expansion. Financing options available for small businesses are small business credit cards, Microloans, SBA (Small Business Administration) loans, ROBS (Roll Over for Business Startups), among the most popular ones.
Our Business Loan Round-Up Criteria
Among all the startup financings available, you want to choose the best financing options for your startup. But to choose what’s best for you, there are some things to mind before doing so.
Please take a look at these factors to consider before we walk you through our 10 best startup financing options.
- Personal Guarantee for the loan: Sometimes, the lenders want a personal guarantee. It shows a personal commitment from your side, which assures them that you will pay the loan from personal fundings even if your business fails to repay the loan.
- Equity in your startup: Most lenders will want to provide you a loan or capital in exchange for some equity, meaning ownership over some share in your business, and you may have to give up some equity at some point. Decide early about the portion you are willing to sacrifice.
- Meeting the cost of loans: Though long-term loans are the most popular and trusted choice due to the large capital and low-interest monthly repayment opportunity, they cost more overall than a short-term loan with a much higher rate. It depends on your business what loan you should go for.
Top 10 Startup Financing Options for Your Company
Now that you are aware of what aspects to consider before financing your startup, it’s time to get introduced to the financing options available to boost the growth of your startup company.
Here is everything you want to know about financing a startup business as we break down the 10 best financing options for a business startup.
Bootstrapping To Fund Your Startup
Self-funding or Bootstrapping is the first and best way to raise money for a business without a loan. But why it’s important is because, generally, entrepreneurs have to struggle with collecting funds. Having no traction or backup money can make the process even more daunting.
Qualifying Criteria
There are no qualifying criteria for self-funding. Just have savings worth showing as traction to your financiers.
How to apply
Bootstrapping is applicable for all kinds of startups as all companies more or less rise from scratch. How far bootstrapping takes your business and its effectiveness depends on the company’s type and size.
Pros
- Facilitates getting funds from lending institutions as they’re more interested in startups that show some traction and potential success rate.
- Having your own money chained to the business will show higher self-commitment from you. It’s a plus for future fundings.
- Helps in mortgaging property and other assets for financial needs.
- Extends resources for the business.
Cons
- You can’t entirely depend on bootstrapping because it is more effective for small-scale businesses. Big projects cannot benefit from it as much.
“Love Money” As A Startup Financing Strategy
Apart from bootstrapping, another financing option to start a business with funding from home is the “love money” received from family and friends. If you have a relative who is a business enthusiast or someone with a net worth high enough to invest in a business, pitch them for capital.
Qualifying Criteria
Earn their belief with your pitch. Once they believe in your idea, they will have a reason to invest. Calling their investment “love money” doesn’t rid you of the liabilities, though. Keep the accounts on paper. Keeping accounts ensures answerability and prevents misunderstandings through a system of mutual trust.
How to apply
- It’s better if the investors aren’t experienced. They won’t ask for stakes in exchange for the loan.
- Don’t accept the loan as a gift. To avoid gift tax, have it modelled as a loan or have them as investors in the business.
- Better to have a legal professional involved throughout.
Pros
- One of the easiest financing strategies for kickstarting startup companies.
- Cost-effective as there is little to no cost here.
- Interest rates are pliable, which is a huge plus.
- Family and friends are the easiest to ask for and agree to successive loans.
Cons
- If the lender lacks knowledge of such transactions, there’s a chance of not reaching a fair settlement.
- Sometimes, loved ones may feel like they can provide unsolicited counsel or interference in the business when they have monetary contributions.
- Any muddle in the deal may cause unwanted misunderstandings.
Crowdfunding Your Startup Business
Crowdfunding is currently a hot financing option for startups looking for funding. It is a virtual platform where entrepreneurs get to introduce their business via crowdfunding campaigns to a large audience who then ‘donate’ or invest in the business they like.
Qualifying Criteria
Not only startups, but any growing business company at any level can also raise funds by crowdfunding. It is a great financing option if the startup is looking for public exposure and a customer base for their product and has some traction flowing already. The main criteria are-
- A popular method is rewarding the contributors by offering discounts on products, pre-order facilities, etc. However, if the donation is a large capital, the reward may be a stake in your business.
- There is also an equity-driven model of crowdfunding, but it is yet to go mainstream.
How to apply
- First, go to the website of your preference and sign in.
- Target a niche and deliver a captivating representation of your services that will ensure a consumer base in no time. Make your consumers have an emotional investment in what you sell. This step is crucial as it determines the success rate of your crowdfunding campaign. It’s better to do some research beforehand.
Pros
- The only startup financing option that gives you exposure and a loyal customer base at an early stage of your business in addition to the finances.
- Potential to create a viral marketing opportunity by public promotion and consequently increase revenue stream.
- It can help your service get good rankings on app stores and others.
- May lead your company to venture capitalists.
Cons
- A highly competitive space.
- Lengthy process. You have to keep your customers or backers updated.
- Platforms can charge up to a 10% fee on the raised money. Some don’t grant access to the funds until you reach your goals, plus the expenditure on the rewards.
Angel Investors In Startups
Angel investors have excess cash ready to invest in startups and early-stage businesses in exchange for some equity. They invest large capitals during the early stages when the potential risk is the highest, hoping for large-sum profit outcomes. They provide debt-free loans, meaning no repayment of the loans is expected. Iconic high-margin companies like Google, Yahoo, Facebook, etc., are glorious examples of angel financing. Visit for more.
Qualifying Criteria
You need an enthralling pitch showing a high potential success rate and traction with a solid marketing plan to compel investors to finance your startup. Things that pick their interest –
- Innovative technology-based business or intellectual property
- Your commitment and understanding of the marketplace
- Possibility of amping up round-up operations after progress.
How to apply
- Have yourself recommended by a close acquaintance of the angel. Look if you have connections to potential angels. Use LinkedIn or angel investor associations and startups to do so.
- Better to approach angels who’re experienced in your sector. Serial entrepreneurs with success at past liquidity are often the best of the bunch.
Pros
- Networks to strategic partners and venture capitalists, lawyers, investment bankers, etc.
- Expertise and mentorship, along with knowledge of strategies for successful marketing.
- Debt-free large capital in exchange for partial equity.
Cons
- Generally, aim for high-margin success with huge capital funding. Doesn’t cater to small businesses.
- Can claim up to 30% share.
Venture Capitalists In Startup Financing
Venture capitalists (VC) are a financing option similar to angel investors. The core difference is that VCs are groups and focus on selective high-potential big projects.
Qualifying Criteria
- Prefer selective industries like software, digital media, biotech, etc., based startups.
- They invest considering the company’s current stage like early-stage, seed investment, or later stage with revenue.
- Beneficial for small businesses that are already generating cash flow.
- Region-based
How to apply
- VCs prefer businesses that are already showing traction and growth. Present your credibility on the same to boost your chances.
- VC opportunities are scanty. The best way to approach a VC is through an introduction by a reliable acquaintance of theirs.
- Make an “elevator pitch” solid enough to bag an investment then and there.
Pros
- Can provide mentorship, customer, networks, and employees, much like angel investors.
- A very hands-on engagement throughout which enables your startup to bloom rapidly.
Cons
- Catered to startup financing for companies that have an existing revenue stream and large profit opportunity
- Invest against equity and leave when there’s an IPO or acquisition. May have short-term loyalty policies towards your company.
Small Business Credit Cards As A Funding Option
Business Credit Cards are a great way to make your business professional besides financing your startup. While there is a rising number of credit card issuers for small businesses, there’re also ample business cards suitable for the up-and-running businesses
Qualifying Criteria
The qualifying chances solely depend on the startup/business owner’s strength of personal credit score.
How to apply
- Apply through banks or online
- Crucial to ensuring maximum accountability, consistency, and transparency.
- Maintain a strict budget on the expenses extracted from the credit card to protect usage limits.
- Includes two forms of interest rates – Fixed and Variable.
Pros
- Act as assets for business expansion.
- Quick solution to short-term debts and savings through cashback bonuses.
- Extreme credit limits help to cut down costs and make it easier to dwell on a tight budget.
- Timely transactions by the card also create a positive credit score.
- Helps to track employee expenses. You can also boost employees’ motivation by giving cards to your trusted ones.
Cons
- Any fault down the line will result in a negative personal credit score.
- Liability to repay the loan even after bankruptcy.
- Any unpaid balance can raise interest rates by 5%-19.9%.
P2P Loan To Finance Your Startup
P2P loan or peer-to-peer loan is an alternate take on crowdfunding and bank loan combined. It is a personal billing process between two “peers,” available only online. The entrepreneur opens an account on a P2P platform that directly links them to potential lenders.
Qualifying Criteria
- A financing option for all kinds of startups but focuses more on established ones.
- Notable credit history isn’t essential.
- The fewer the number of outstanding debts, the lower is the interest rate on the granted loan.
- With a timeframe of 1-5 years on average, they carry similar interest rates like credit cards. But unlike credit cards. P2P provides a lump sum payment opportunity for installments.
How to apply
- Offers of loans start appearing right after sign up.
- You may have to provide more necessary information along with some legal documents.
- After scrutinizing your application, they will match a suitable investor. The loan takes about 7-45 days to be transferred to your bank account after it’s granted.
Pros
- Efficient funding option for businesses with low working capital.
- Easier financings or loan facilities without much complication.
Cons
- Loans can be denied due to inadequate income, risk of bankruptcy, etc.
- This loan is less protected than those of banks due to fewer legal requirements. Interest rates are fairly higher.
Microloans For Startup Financing
Microloans are designed for small businesses or startups looking for limited funding facilities or seed capital to get their startup off the ground. It mainly works for businesses without sufficient working capital to qualify for a bank loan. It is mainly catered to specific niche-based startups and is one of the most advantageous financing options out there.
Qualifying Criteria
There are regional microloan providing organizations or NBFCs (Non-Banking Financial Corporations) catering to selective sector-based startups. To grant loans, they screen the borrower’s credit history but sometimes lend funds to businesses with zero credit ratings based on the type of the business.
How to apply
- Better to make a traditional application and have all the required legal documents arranged.
- References or collaterals can be a bonus.
Pros
- Microloan lenders offer their loans as part of a community-based service. Likewise, they perform other development activities which are beneficial to your business.
- Provides installment loans that offer a monthly payment facility.
- Not only do they provide loans to borrowers with a poor to no credit history, but they lead to building a good credit report later.
- No equity issue.
Cons
- High interest rates of up to 18%.
Getting Government Grants to Finance Your Startup
A great way to fund your startup is by getting government grants that are appropriate for your startup finance. Any government grant can accelerate the desired growth or success of your startup.
Qualifying Criteria
- Different government grants have different qualifying criteria.
- The government mainly favors specific types of business/startups.
- Startups related to research and development of science, innovative technology, or renewable energy sources have the upper hand.
How to apply
Usually, government grants are found enlisted on particular websites. To apply, you have to do some in-depth research on trusted sites. It’s better to consult someone who is experienced in this, like a fellow entrepreneur who applied for the same in your homeland, as government grants vary from country to country. Beware of scammers!
Pros
- Government grants, be it regional or national, is the only financing option that is entirely debt-free and equity-free.
Cons
- The only drawback here is the lengthy and drawn-out process, starting from application to acceptance of the grant.
Bank Loans
Bank loans are one of the most traditional and trusted financing options up to this day. It is the first financing option that any entrepreneur thinks of.
Qualifying Criteria
There are two types of startup financing options available in banks-
- Providing working capital
- Funding
How to apply
- Bank loans require a presentable business plan, traction record (if any), and the other usual documents and data.
- It is recommended to have a good relationship with the bank as no bank is going to sanction a loan to someone walking in for the first time. It is even better to apply through a relative or acquaintance working at the bank.
Pros
- Has a wide range of loans catering to various-scaled startup projects
- Low-interest rate by some banks
- A bank loan is a secure financing source
Cons
- The process is long and demanding.
Final Thoughts
Funding your startup is a grueling task. But in today’s time, there is a wide range of options for financing a startup. It comes down to strategic planning, priority establishment, and research on your niche-based startup financings to choose the best funding options for your startup.
