What are the Primary Sources of Funding For Startups
A great startup idea needs money to succeed. Even when you have got everything in order, a lack of financial resources can kill your startup dreams.
The first thing you need to worry about is securing funding for your startup.
We have discussed 14 funding sources available for startup businesses. You’ll surely find a funding source fit for your startup.
Where to get startup funding?
Here are your top options for getting startup funding. Do a thorough analysis of your business and see what funding source will serve your unique needs the best.a
- Bootstrapping or Self Funding
- Debt Financing
- Equity Funding
- Small Business Grants
- Love Money from Friends and Family
- Startup Incubators/Accelerators
- Angel Investors
- Venture Capital
- Bartering Goods or Services
- Engage a Customer against Exclusive Rights
- Crowdfunding
- Business Credit Cards
- Nonprofit Loans and Grants for Underrepresented Groups
- Bring in a Partner
Our Picks for the Best Startup Business Funding Sources
Some types of funding for small businesses and startups are better than others. However, there are few funding sources for startup businesses that are suitable for most because of easy access and possible quick availability. Let’s look more into our top startup funding sources picks.
Loans
Loans, or debt financing, helps you access capital without offering any equity. You are still 100% the owner of your business. However, getting loans or lines of credit for new businesses with a credit history is hard.
Credit Cards
Business credit cards are an excellent solution when you need money for daily business operations. Credit cards offer limited flexibility as you’ll need to pay the credit card bill in the next month.
Credit cards are particularly helpful for startups who have already launched and struggling with day-to-day operations.
Angel Investors
An angel investor is a business veteran who invests in small businesses and startups for a small share in the ownership.
Angel investors invest in a business they believe in. Their money, along with their business expertise, can help you make sustainable growth.
14 Top Funding Sources for Startups
Let’s take a deep dive and discuss the types of funding for startups you can get for your startup.
1. Bootstrapping or Self-Funding
The most frequently used source of funds for startups is entrepreneurs own money.
Bootstrapping of self-funding is using your savings for your startup. Using your money gives you full control over your company and you can decide how you want to steer your business.
One drawback of using this source of funding is that self-funding is always in short supply. Your saving may not be worth much.
SBA says that the average micro business cost is around $3000 and the average home-based franchise cost is anywhere between $2000-$5000. Be ready for looking into other options if your startup idea needs more money.
Use this calculator for calculating your startup cost.
Things to Notice: Interested in starting your business with bootstrapping, read ‘Bootstrap Business’ by Rich Christiansen. Rich has already successfully launched over 30 companies with his own money.
2. Debt Funding / Loan or Line of Credit
Debt funding involves borrowing money in the form of a loan, most commonly from a bank or lending institution. The loan is then repaid with interest over a specific time (i.e., the “Term”).
Debt funding is of the most reliable sources of funding for businesses and startups. While eligibility requirements can vary depending on the type of loan you are seeking, most lenders and loan programs require you to use some of your own money as an owner contribution or you’ll have to offer collateral for the loan.
Traditional bank loans usually require a 20% owner contribution or more, while other loan programs require less (for example, some Small Business Administration (SBA) loans only require 10%).
Since the business is in its infancy, many lenders will make decisions based on your personal credit history.
Pro Tip: “Understand how SBA loans and debt funding for small businesses work with our intuitive, detailed guide
Things to Notice:
- Be ready for owner contribution and collateral
- Prepare a sound bank business plan that proves the feasibility of your business idea. Along with other things like your personal credit report, lenders will also use your business idea to assess the credit risk.
- If your business is not an LLC, your personal assets are at risk if you default on your loan. Consider forming an LLC to protect your personal assets.
Get Your SBA Loan Business Plan
Our experts have worked with the SBA for over 15 years, So to ensure your loan is approved, your SBA business plan writers meet all the SBA requirements.
Discover how Wise Business Plans can help you create a SBA loan business plan today
3. Equity Funding
Equity funding involves procuring investment from a person or organization that receives a percentage of ownership in your business in exchange for their investment.
Equity funding is among the easy sources of funding for startups. You are giving away a part of your company against funding and, if your business idea is convincing, many people would want to invest in your startup.
Venture capital (VC) firms and angel investors are some of the more common sources of investor funding for startups, although anyone able and willing to invest their money into your business can potentially be an investor.
If you are pursuing an investment through a VC firm or other formal channel, then the terms and conditions of your investment will be negotiated before the investment is granted; they will also be detailed on a document known as a “Term Sheet.”
Bonus Tip: Here is a step-by-step guide on how to find venture capitalists.
Things to Notice:
- Equity funding is an investment against a share in your company
- Investors are interested in maximizing their return over investment (ROI) with your business
- The investors’ share will change with changes in your company
- As this is an investment, not a loan, you owe nothing to investors if the business fails
4. Small Business Grants
Various government agencies and other institutions offer small business grants, most of which have specific eligibility requirements. For example, some grants are specifically for businesses in rural areas.
A specific institution’s requirements are usually listed on its website, along with details on how to apply.
In addition to meeting eligibility requirements, you will usually be expected to demonstrate in your business plan how the grant money will be used and why it is needed for your business’s launch.
An institution will usually want you to demonstrate how the success of your business will benefit those who the institution serves.
Check a great comprehensive small business grants list here. You’ll surely find a grant program suitable for your startup.
Things to Notice:
- Grants are gifts for businesses that are given under certain eligibility criteria and are not repaid
- A convincing business plan is critical for securing a business grant
- You will be accountable for govt grants to prove with documents that you have properly used business grant
Get Business Grant for Your Startup
You have plenty of opportunities for a business grant. Make sure you don’t miss a chance.
Check our easy-to-understand and thorough guide on small business grants today.
5. Love Money from Friends & Family
The money your friends and family give you for your startup is affectionately called ‘love money’.
Friends and family can give you a loan or they may ask you for a share in the company.
If your friends and family trust in your business ideas and your capacity to make it a financial success, they will invest in it. This trust is a signal for angel investors or VCs that you have real skin in the game.
These are some useful tips for borrowing from friends and family.
Things to Notice:
- Friends or family may give you a loan for your startup or they may ask for an equity share.
- Investors would like to see you have real stakes in the game. Investment from friends or family shows their confidence in your business idea and your ability to make it happen.
6. Startup Incubators/Accelerators
Startup incubators give valuable support to infant startups. Many startup incubators provide mentorship, office space, and sometimes, investment too.
Incubators or accelerators often focus on high-tech startups. Some business incubators are run by local governments to boost job creation and the development of the local industry.
Many startup accelerators offer an end-to-end solution for startups from product testing and mentorship to funding.
Bonus Tip: Here is list of 17 best startup incubators & accelerators in the USA.
Things to Notice:
- Incubators or accelerators are often focused on high-tech startups
- Incubators offer valuable resources like office space, mentorship, labs, networking events, etc.
- Some startup accelerators also help you secure funding
7. Angel Investors
Angel investors are veteran business people who trust you and your business idea. They will back your business for a small equity share.
Another great thing about angel investors is that they offer valuable mentorship that is hard to find for startups. Angel investors can be among your friends and family or someone from your network.
Angel Capital Association (ACA), Angel Investment Network, and AngelList are a few of the places to find the right backer for your startup business.
Things to Notice:
- Angel investors are people with extensive experience who will give you the necessary funding for an equity share
- Angel Investors can be among friends, family, your network, or a total stranger who believes in your business idea and your ability to successfully execute that idea.
- Angel investors generally offer a small sum of money like $25,000-$250,000.
- Use Angel Capital Association (ACA) as your first step in finding angel investors for your startup business.
- Having a angel investor business plan can help you get investment from an angel investor.
8. Venture Capital
Venture capitalists are professional investors who will make a large investment in your startup business against a chunk of ownership share.
VCs are interested in businesses with proven market demand for the product or service and established revenue sources.
If your startup is still in product testing or the early launch phase, venture capital is not a great idea for you. Also, VCs invest a lot of money. The average deal size in Silicon Valley in 2021 was over $20 million.
Bonus Tip: Here is a step-by-step guide on how to find venture capitalists.
Things to Notice:
- Venture capital is not suitable for early startups.
- Venture capitals (VCs) invest in proven startup ideas
- If you need a small investment, like below $5 million, you may face a hard time finding a VC
- Having an investor business plan help you winning funding from a venture capitalist.
9. Bartering Goods or Services
The first marketplace exchange system of barter has found its place in the modern startup ecosystem
You can save money and access the goods or services you need for your startup by bartering with other businesses.
For example, if your business repairs computer hard drives and you need a printer for your office, you can offer a free hard drive repair service to a printer shop against a printer. That way, both parties exchange value without money.
Things to Notice:
- You can barter your goods or services with other businesses for the product or service you need for your startup.
- Barter is limited in scope. Some businesses or industries may not favor barter trade.
10 Engage a Customer against Exclusive Rights
You can find customers who will cover your product development and testing cost. They negotiate early and prioritized access to the product before the world.
However, the bargain for you is you’ll have to give them some control over your production process.
Committing to a major customer is a common practice in the startup culture. You’ll find large companies doing the same when they develop and test a new product.
Things to Notice:
- Give priority rights to a big customer against funding for product development and testing
- The customer will partly control your production process and demand priority support
11. Crowdfunding
Entrepreneurs are problem solvers. if your product can solve a problem, crowdfunding is one of the sources of capital for entrepreneurs that is easily available without any obligations.
Crowdfunding is when you ask the public to invest in your business idea and people make a small per capita contribution. It is a new method in startup funding with little barrier to entry.
You make a promise to people that your product or service will work and that’s all they want. If you fail, no one will demand their money back.
Interested in crowdfunding for your startup? Explore crowdfunding platforms like Kickstart, Indiegogo, and Patreon. Mobile-first bank Monzo is one of the success stories of crowdfunding.
Bonus Tip: Your startup success may be only one crowdfunding campaign away. Learn to setup and raise startup funding with crowdfunding today.
Things to Notice:
- Crowdfunding is public making small per capita investments in your business idea
- Anyone can put their business idea for crowdfunding on platforms like Kickstarter, Indiegogo, etc.
12. Business Credit Cards
Business credit cards are useful for helping you run your day-to-day business operations. Business credit cards offer limited credit typically between $10,000 to $50,000.
The drawback of business credit cards is you’ll pay the credit card bill every month. You can’t use it for long-term investment.
13. Nonprofit Loans and Grants for Under-represented Groups
Nonprofit grants are usually for businesses run by underrepresented groups like minorities, veterans, ethnicities, etc. These grants are strictly vetted and you’ll only be able to get this grant if you meet their criteria.
14. Bring in a Partner
A wealthy partner is a quick solution to startup funding woes.
A partner will essentially be an angel investor who will invest in your startup against an equity share.
You can also bring in another company as a partner. You can grow faster with their money and business skills.
What is the right startup funding for you?
The right startup funding source for your business idea depends on many factors including:
- Your business idea
- Startup business stage like ideation, product development, product testing, market testing, etc.
- Your industry Your startup funding needs or the amount of money you need
FAQs:
Venture capital funding is when investment firms provide capital to startups in exchange for equity. VCs typically focus on high-growth businesses with the potential for significant returns.
Angel investors are individuals who invest their own capital in startups, often in the early stages. They provide financial support, expertise, and mentorship to help startups grow.
Seed funding is the initial capital raised by startups to support product development, market research, and team building. It can come from angel investors, VC firms, or even crowdfunding platforms.
Crowdfunding involves raising small amounts of capital from a large number of individuals through online platforms. Startups offer rewards, equity, or pre-sales of their product or service to backers.
Yes, some governments offer grants and funding programs specifically designed to support startups and promote innovation. These grants can provide financial support and resources for early-stage ventures.
Your blog is very useful and I got to know that getting funds for a business start-up is not that difficult. It’s very easy to apply for funds If you have proper documentation, reasoning, and a perfect plan.