Takeaways
- Small business loans from banks or credit unions seed many business ideas.
- Entrepreneurs can self-fund their business with a slush fund or other cash windfall.
- Starting a business can boost your net worth and give you autonomy.
- Many startups are funded with credit cards, personal loans, and investment capital.
- Established companies can issue common stock or bonds to fund projects, enter new markets, and launch products.
When you have a great business idea, bringing it to life can be incredibly rewarding. Starting your own business is undoubtedly only for some. One of the consistent themes among entrepreneurs, small business owners, and anyone trying to grow their business is how to get the investment capital you need to fund your startup.
Successful businesses need cash to invest in new projects, product launches, or marketing campaigns. Companies might also need funds to bridge a financing gap, like meeting payroll before a large check arrives. Startup financing lets entrepreneurs get their businesses off the ground to attract more meaningful capital.
Here, we explore different ways companies can successfully obtain the capital they need to take their business to the next level.
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3 Categories of Startup Capital
For businesses of almost any size, there are three main types of capital to consider:
- Sweat Equity: Entrepreneurs and small business owners are open about putting significant hours into their business ideas. Your situation depends on when and where you can work on your business idea.
Most founders start with a business idea and work on it before or after their full-time day job. Others start a side hustle that morphs into a larger business they must focus on full-time. Working long hours without finding outside capital for your business is called putting in “sweat equity.” This is where most founders start. During this phase, most founders invest their time and self-fund their businesses through personal savings.
- Equity Financing: Once you can get customers, establish recurring revenue, or successfully gain a foothold in a market, you should consider raising a large amount of money. If you need to fund your startup with thousands of dollars and don't want to self-fund the company, consider issuing equity, or common stock, to investors.
The size, scale, and sophistication of your business usually dictate where you raise your money. This could come from family and friends or accredited investors in the early days of a company's lifecycle. For more mature companies, this could be through an IPO. All equity financing gives investors a slice of ownership in your business.
- Debt Capital Financing: Founders sometimes want to avoid dealing with investors. If you wish to retain more ownership, avoid updating investors, or need access to cash quickly, debt financing might be for you.
Debt financing is taking out a loan to start your business. Many established businesses get business loans from a bank, issue bonds, or get bridge financing with short-term microloans to get the cash they need. Like with other forms of debt, they eventually pay back the loan to the bank or credit union.
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9 Ways to Fund Your Startup
Business financing can come in a variety of forms. Your size, stage, and capital needs dictate the best capital-raising route. Here are nine ways to consider funding your business:
Equity Capital Financing
1. Self-Funding
One of the fastest ways to fund your startup is with cash savings. Overzealous entrepreneurs can dip into their emergency fund, but most financial advisors argue against this tactic. Instead, consider dipping into your slush fund or setting aside investment capital into a business banking account to fund your startup.
Serial entrepreneurs typically invest their own money into a business to get it started. From there, they try to fund their business with the company's revenue or look for other forms of capital so that they don't overinvest a large percentage of their net worth in a high-risk investment.
Best For: Paying for early business fees and website costs (development, domains, etc.), and other infrastructure
Amounts: ~$100-$10,000+
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2. Angel Investors
Once you progress past using all of your own money or want to avoid risking your savings on a new and unproven business idea, the first tranche of investors most small businesses find themselves talking to are angel investors.
Angel investors are high-net-worth individuals, family offices, or accredited investors who specialize in funding new businesses to get them to the next stage of growth and financing opportunities. They buy stock in your company in the hopes that it will grow, and they eventually sell it for a higher price.
Best For: Early-Mid stage businesses needing to raise money
Amounts: ~$10,000-$1,000,000+
3. Venture Capital
Many aspiring entrepreneurs associate “venture capital” with “Silicon Valley.” The truth is that there are venture capital firms all over the United States that specialize in providing checks to intriguing new businesses that have the potential to flourish into multi-million-dollar businesses that may even become a publicly traded company (more on that below).
Venture capital firms mainly focus on investing in private businesses. Small businesses, family-owned companies, or startups on the verge of taking their business to the next level can benefit from a venture capital investment. They tend to write multi-million-dollar checks, get a seat on the board of directors, and professionalize a business.
Best For: Mid-stage businesses needing to raise money
Amounts: ~$1,000,000-$50,000,000+
4. Initial Public Offering
When your business has matured beyond the traditional venture capital and accredited investor phases of raising money, there are still modes of raising funds to consider. An IPO is one of those avenues and is often considered the holy grail of startup financing.
An initial public offering (IPO) is when a private company is listed on a major stock exchange like Nasdaq or NYSE, and its common stock becomes publicly traded. From here, stock traders, retail investors, and institutional investors like hedge funds, mutual funds, and pension funds can invest in your business.
Best For: Mature company needing to enter new markets, fund products, or invest in research and development
Amounts: ~$50,000,000-$500,0000,000+
Debt Capital Financing
5. Credit Cards
Many startups begin with a swipe of the credit card. Founders and co-founders who can't pool together enough cash to start their new venture debt-free often turn to credit cards. Founders who want to hack the system usually use long introductory 0% APR balance credit cards to give themselves plenty of repayment runway.
Business credit cards can be set up quickly and confer all the advantages of personal credit cards. To establish a credit card for a business, you must prove that the C Corporation, Limited Liability Company, or Nonprofit exists. From there, you can personally guarantee the business card or have the business's assets act as collateral.
Best For: Paying early startup costs
Amounts: ~$100-$30,000+
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6. Business Loans
When most people think of startups, they think of sexy Silicon Valley technology companies. Going to a bank and taking out a business loan seems outdated. However, the reality is quite different. A recent survey found that 44% of small businesses obtained financing from banks.[1]
For example, small businesses like doctors' offices, law firms, accounting offices, and dentists can take out a traditional business loan to purchase equipment and supplies, purchase real estate for their offices, and meet payroll. Small business loans are the lifeblood of the economy.
Best For: Revenue-producing startups
Amounts: ~$10,000-$500,000+
7. Personal Loans
For those with an aversion to small business loans or who want to get funding online quickly, taking out a personal loan can give you the cash you need. Personal loans charge lower interest rates than credit cards; if you have an excellent credit score, there might be added perks.
Applying for a personal loan will appear on your credit report as a hard inquiry, so consider this option. While some personal loans are limited in capital use, many are open-ended. Personal loans can be used to bridge a small business in a cash flow pinch. For example, you might need to pay yourself or employees today but find yourself out of cash. However, you are waiting on a major client's check, which isn't due for another 30 days.
Best For: Founders with good credit waiting for a cash payment
Amounts: ~$500-$50,000+
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8. Microloans
You can get a microloan if you can't qualify for a traditional business loan. Microloans are small-dollar business loans intended for companies and entrepreneurs with limited credit histories. You can use these loans to fund startup costs, invest in growth plans, purchase equipment, and more.
The Small Business Administration offers microloans up to $50,000, but other financial institutions typically lend only a few thousand dollars. Microloans have shorter payback terms than traditional business loans.
Best For: Founders with poor or limited credit history
Amounts: ~$500-$50,000+
9. Convertible Debt
Founders who want to wait to sell a piece of their business for common stock should consider issuing convertible debt. A convertible note is a form of structured debt that allows business owners to receive cash like a traditional note. The convertible note has a principal amount (the amount borrowed) plus accruing interest payments (based on the APR).
The difference between installment notes and convertible notes is that the purpose of a convertible note is to allow the debt holder to convert their debt holdings into an equity position, usually at a discount. The debt-to-equity conversion trigger is based on a milestone like raising more cash, reaching a particular valuation, or achieving a specific event, like signing a significant business development deal.
Best For: Mature revenue-producing companies
Amounts: ~$500,000-$10,000,000+
Smart Summary
Starting a small business can be extremely rewarding. Entrepreneurs gain autonomy over their day, meet new clients, and relish converting their business ideas into reality. Funding your startup is a critical aspect of keeping your business running. Depending on your preference, you have a buffet of options ranging from self-funding, using credit cards, taking on investors, or taking out a traditional bank loan. Your business model can drive the balance between equity and debt capital, but many entrepreneurs take the route of least resistance to keep their companies well financed.
Frequently Asked Questions
It depends on your commitment to starting your own business and how good your idea is. You don’t need to start your own business to be an entrepreneur. Here are 29 Proven Side Hustle Ideas to consider.
This comes down to personal preference. Some entrepreneurs want access to cash to grow and expand their businesses quickly and are comfortable taking out debt or raising equity. Other business owners don’t mind leveraging non-cash ways of accelerating business growth and take a steadier approach to development with business revenue.
Building a successful career takes work. Putting in the time to get a promotion or advance your career takes time and effort, so giving up your day job to start your own business full-time might not be the best solution. Consult your financial goals and ensure that leaving your day job is the best decision. Most of the time, it comes down to timing, financing, and passion.
(1) New York Federal Reserve. Small Business Credit Survey. Last Accessed January 13, 2025.
