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Funding your startup
A million dollar business idea is useless if it remains written on a napkin. Learn the best ways of securing funding to build your dream.
Aug 14, 2019 • 26 minute read
Updated on Jun 29, 2022 by Product Knowledge T.
Product Knowledge Specialist at Freelancer.com
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You're going to need some capital to get your business off the ground. Here are the top options for financing your business idea
Once you've got a great business idea and you've written out a plan, you're going to need some funds to get started. How much you need will depend on the type of business you're launching.
Fortunately, there are a lot of different funding options to help you build your empire. But first things first: let's figure out how much capital you'll need to get yourself started.
Figuring out how much capital you need
As we mentioned before, the amount of capital you need is going to depend on the type of business you're launching. Regardless of your business, though, your startup costs are going to fall into three main categories.
Business expenses
Your business expenses are your costs you'll incur to operate your business. To start your business, this could include things like marketing materials, legal fees, any fees involved in registering your business (the average cost in the US is $800–1,000 USD), website costs, salaries and office rent. The good news is these expenses are tax deductible. The bad news is you'll still need a chunk of change to get started.
Business assets
Your business assets are going to cost you money as well, but they're tangible items of value that your business owns. This could include inventory, office furniture, equipment and vehicles.
Cash reserve
Cash technically falls under business assets, but it's important to spend some time on this subject. It's crucial to figure out how much cash you'll need on hand.
Your cash on hand, or cash reserve, is money you actually have sitting in your bank account. Its purpose is to help see your business through tough times.
Figuring out your cash reserve is pretty simple. Just look at your projected monthly expenditures and multiply this by the number of months you want to have cash in reserve for. In other words, in the worst case scenario that your business goes through a period of no revenue, how many months' cushion do you want?
Most experts recommend a cash reserve of between three and six months' expenditure. It can be tempting to keep a large cash reserve, but just remember that every dollar you tie up in cash is a dollar you can't use to grow and expand your business. You need to find a figure that strikes a balance between providing security and giving you room to invest in your business.
Once you've figured out your startup expenses, startup assets and cash reserve, add these figures together and you've got the amount you'll need in startup capital. Go ahead and add 10% to this figure to give yourself a bit of a cushion in the very likely event that some costs are more than anticipated.
What you'll need to get started
Now that you have a good idea of how much capital you'll need, you're probably eager to start raising money. But before you jump into securing that sweet, sweet cash, there are a couple other details to get in order. After all, anyone investing in your business is going to want to know that you have a well thought out plan.
Business plan
Hopefully you read our previous chapter on how to write a business plan. If you didn't, though, here's a brief summary of what a business plan entails:
Value proposition: This is a summary of the solution you're providing to customers, and what makes your solution unique.
Market research: Your market research should detail demand for your solution and your ideal customer demographic. It should identify the market you'll be operating in and the opportunities in that market.
Funding: This is a summary of the funds you'll require to get started and how you plan to use those funds.
Milestones: This identifies the major milestones your business plans on hitting, and an estimate of when you'll hit them.
Resourcing: Your human resourcing should identify what roles you need to fill and profiles of the sort of staff you'll need.
This is just a synopsis, and your business plan should go into detail on each of these points. If you haven't read our chapter on writing a business plan, you should really go back and read it now.
5-year financial projections
Any investors you approach are going to want to see financial projections for at least the first three years of your business, and some may want to see up to five years. You should break your projections down month-by-month for the first year and then by quarter for the following years.
Your financial projection will take into account your expected sales minus your expenses. Be sure to be specific, showing how you're pricing your product or service, the number of sales you're projecting for each month or quarter and itemizing your expenses in detail.
Creating financial projections for a company that hasn't even launched can be tricky. This is where some in-depth research is required. You need to examine the industry you'll be working in and determine demand based on competitors. It could be a good idea to get the advice of an accountant who's worked in your industry.
Your projections shouldn't be unrealistic, but they also shouldn't be overly conservative. Remember you're trying to attract investors. You want to present them with an attractive projection.
Once you have a detailed business plan and financial projections, you can start approaching investors. But what kind of investors should you approach, and do you even need outside investment? Here are your options:
Put your own skin in the game
What it means
If you're in a position to finance your own business venture, that's fantastic. It's an uncommon position to be in (unless you keep your operation lean, which we totally recommend and will address later). But even if you can't entirely finance your startup on your own, you should still put some of your own money into it. It sends a signal to investors that you believe in your idea enough to back it yourself.
How to do it
You can use cash if you actually have enough on hand to finance your business. Once again, if you keep your operation lean it won't take much cash to get yourself up and running.
If you do require more cash, you could consider selling items you don't need, or even getting a second mortgage on your house. It's risky, we know. But starting a business requires a certain tolerance for risk.
Pros and cons
You won't be indebted to anyone
You won't need to worry about finding investors
If you need a significant amount of startup capital, you might not have enough funds on your own
Using your own funds is high risk
Get a bank loan
What it means
Banks offer a variety of loans that could help you get your business running. This could be a personal loan, which is money lent to you rather than your business. It can either be secured by some sort of asset, or unsecured. The difference is that a secured loan gives the bank recourse to take possession of the asset in the event you default on the loan.
You could also get a line of credit. This is a fixed credit amount you can draw from. You'll only be charged interest on the amount of credit you use, but a bank can require full repayment of a line of credit at any time.
If you're in the United States, many banks offer SBA loans. These are loans backed by the Small Business Administration . This makes it possible for businesses without a lot of collateral to get financing. They're easier to qualify for because they're lower risk to the bank, as the SBA guarantees up to 85% of the loan.
Finally, one of the most common types of business loans is a business term loan. These offer you a set amount of capital paid off over a fixed timeframe.
How to do it
Bank small business loans aren't easy to qualify for. It's an attractive form of financing, generally with low interest rates. As such, banks are picky about the businesses they lend to.
To put yourself in the best position, you'll need a good personal credit score. For Americans, this means a FICO of 700 or above. You'll need to demonstrate to the bank that your personal financial position is sound, and that you can meet your obligations without siphoning off of your business.
Banks will also want to see a detailed business plan and a full financial projection. You'll need to provide your personal tax returns, and you'll need to tell the bank exactly what the loan will be used for.
We're not going to sugarcoat it: startups, particularly in the United States, face an uphill battle getting bank small business loans. Some countries, such as Canada, have banks that are friendlier to startups. But most American banks want a business to have existed for at least six months and be bringing in at least $100,000 in annual revenue before approving a business loan.
An SBA loan is the best bet for a startup seeking bank funding. There are a few different types of SBA loans. The SBA 7a loan is the most common type of SBA loan. This provides funds up to $5 million USD. If you're a startup, your best bet of qualifying for an SBA 7a is to have a proven business model that the bank sees as low risk (such as a franchise).
One of the better SBA loans for startups is the SBA Express loan. This loan caters to startups needing a smaller amount of capital, with loan amounts up to $350,000 USD. This loan is typically easier to qualify for since the maximum lending amount is so much smaller.
Express loans are also quicker than SBA 7a loans. While an SBA 7a loan can take weeks or months to process, an SBA Express loan is approved or declined within 36 hours, and funds are typically available within 90 days.
If you do go for an SBA loan, you'll need to have a sizeable down payment. Lenders typically require a 25–30% down payment on SBA loans, so you'll either need to come up with that amount yourself or secure it from other investors.
Best banks for small business loans
If you're a startup, you'll definitely want to head to a bank that offers SBA loans. The Small Business Administration publishes a list of the most active SBA 7a lenders in the country, and the top five banks for SBA lending are:
Live Oak Banking Company
Wells Fargo
The Huntington National Bank
Newtek Small Business Finance
Byline Bank
Of these, Huntington National was the only one we could definitively identify as participating in the SBA Express program. However, some other lenders that offer SBA Express loans include:
Citizens Bank
TD Bank
Timberland Bank
Pros and cons
Long loan terms
Low interest rate
Low monthly repayment
Difficult to qualify for
SBA loans require a large down payment
Other loans require a business to have operated for at least six months
Get a grant
What it means
A grant is any sort of gift or subsidy bestowed upon an individual or organization for a specific purpose. Grant funds don't have to be repaid.
How to do it
There are a plethora of grants available for starting a business, but that doesn't mean there are piles of money lying around for the taking. Competition for grants is fierce, so you have to make a very good case for your business.
The first step in securing grant funds is researching the grants available and determining which ones are the best fit for your business. Grants are for specific purposes, and most have very specific focuses such as helping businesses doing research and development, funding businesses that will export goods or aiding women and minorities looking to start businesses.
If you find a grant that looks like a good match for your business, you'll need to go through the application process. Each grant will have its own application process and criteria, but you'll generally need to write a grant proposal.
Grant proposals will differ based on the submission requirements for each grant. Some organizations may require a full grant proposal, which can be around 25 pages long and detail your project, the funds you'll require and what they'll be used for. There are freelance writers who specialize in writing grant proposals, and if the grant you apply for requires a full proposal we strongly suggest utilizing this service.
Some grants may only require a Letter of Inquiry (LOI). An LOI is often the first step of the grant application process, and allows an organization to see if you're a good fit for their grant funds. This is basically your elevator pitch: a short, punchy description of what you're trying to accomplish, what you need and how you'll use the grant funds.
Some other grants may ask for a letter proposal. This is a bit longer, generally a few pages, and once again describes your project, the funds you need and how they'll be used. While you may be able to craft a winning LOI on your own, we'd also highly recommend a grant writing specialist for grants requiring a letter proposal.
Federal, state and local small business grants
The US Small Business Administration funds a few grants that can help get your startup off the ground, depending on your focus.
If you're looking to produce or sell a product and are open to targeting overseas markets, the SBA's State Trade Expansion Program (STEP) could be a good fit. The STEP grant goes directly to state agencies to support export development and increase the number of US small business exporters.
The Small Business Innovation Research (SBIR) grant helps fund startups in the tech field that are focused on research and development. If your startup is focused on R&D and tech, this grant could be a good fit.
If the tech you're developing could have nonprofit applications, look into the Small Business Technology Transfer (STTR) grant. It requires small businesses to collaborate with a research institution such as a nonprofit, a university or a federal R&D department.
In addition to federal grants, many individual states and even local governments also offer grants to small business. Do some research into the grants offered in your state and city to see if your business idea qualifies.
Small business grants for women
The Amber Grant awards a different female entrepreneur $2,000 USD each month, with an annual prize of an additional $25,000 USD for one of the year's 12 winners. There's a $15 application fee, but the application process is quick and straightforward. Both US and Canadian businesses are eligible.
The Girlboss Foundation awards a bi-annual grant of $15,000 USD to female entrepreneurs. Not only do winners get funds, they also get great exposure for their businesses on the Girlboss platform.
Small business grants for minorities
The Minority Business Development Agency posts regular updates on grant opportunities for minority business owners. You can find open grant competitions on the MBDA website .
Small business grants from corporates
Here's a bit of inspiration for you: every Fortune 500 company was once a startup, just like you. Fortunately, a few of them remember this and look to give a leg up to entrepreneurs.
There are a number of different corporates offering small business grants, but a couple are particularly good fits for startups.
The Visa Everywhere Initiative focuses on entrepreneurs working on payment platform solutions. It awards $50,000 to the top three submissions each year.
The FedEx Small Business Grant Contest divides $25,000 between 10 winners each year. The application requires a brief description of your entrepreneurial story and business idea, as well as a one-minute video pitching your business.
Small business grant for veterans
The StreetShares Foundation offers an annual grant of $25,000 split between four winners. Applicants must be a veteran, reserve or active duty transitioning military member or spouse. Entry is simple, and requires filling out an online form and creating a two-minute pitch video.
Pros and cons
Funds don't have to be repaid
Competition for grants is fierce
Application process can be time consuming
Approval timeframes can be long
Get a P2P loan
What it means
Peer-to-peer (P2P) lenders match borrowers with individuals or groups of individuals with money to lend. It's a similar concept to crowdfunding, but with more sophisticated mechanisms in place to appropriately price for risk and return. Investors in P2P lenders can choose to invest small or large amounts, pick their risk appetite and then their money will be pooled with similar investors and matched with people seeking loans that fit their profile.
How to do it
P2P finance is much easier to qualify for than traditional bank financing, because P2P lenders can match your business to investors with a higher risk appetite. However, most P2P small business loans require you to have been in business for at least a year.
This doesn't mean you can't get a P2P loan as a startup. It just means you'll have to qualify on your personal finances rather than the strength of your business plan. P2P lenders will typically consider borrowers with lower credit scores, though most will want a FICO of at least 600.
The application process for most P2P lenders is straightforward, and can be done online. Because a lot of P2P lenders have positioned themselves as fintechs (financial technology companies), they have fast approval processes that rely on algorithms rather than humans with a calculator and a rubber stamp.
To get a P2P loan for your business, you'll need to pull together your personal financial information, including your tax returns, pay stubs and bank statements. Just be aware that the amount of funds you'll be able to access with a personal loan will be lower than a business loan (typically up to $50,000 USD).
Best P2P lenders for small business
While there are plenty of great P2P lenders offering personal loans, Upstart stands out to us. They take a more holistic view of their borrowers, looking not just at financial history but at education, work history and area of study. You'll need a minimum FICO of 620, but you can borrow up to $50,000 USD for a three- to five-year loan term.
Pros and cons
Easier to qualify for than bank loans
Low interest rates
Simple application process
Fast approval and funding times
Lower maximum loan amounts than bank loans
Business loans only available to established businesses
Approval will depend on your personal finances rather than the strength of your business plan
Use a credit card
What it means
If you don't have cash on hand and don't want to worry about raising money from investors, you can use a personal credit card to finance your startup costs.
How to do it
This one is a bit of a no-brainer. You just put any startup costs on your personal credit card. Be sure to go through your statements carefully and itemize any business expenses so you can deduct them on your taxes. You should also think about choosing a credit card with a 0% introductory APR so you don't accrue interest during your first year of operation. Rewards points can also be helpful for your business, as you could use them for future expenses like business travel.
Depending on your personal credit, you could also qualify for a business credit card even if you're still in startup phase and haven't earned any revenue. Business cards are a better option for most startups than a personal card, as they make it easier to separate business and personal expenses. Plus, missed payments on some small business cards won't affect your personal credit score.
Best credit cards for small business
The best card for your small business will depend on your personal financial circumstances and credit history, but we think the American Express Blue Business Plus is worth a look. AMEX will consider your application even if you haven't earned any revenue yet, and the card has no annual fee. You'll also earn double rewards points for every $1 spent up to $50,000 per year, and one point for every dollar thereafter.
Pros and cons
Don't have to seek funding
Don't have to have large amounts of cash on hand
Keep equity in your business
Potentially earn rewards points
High interest rate (after introductory period)
Low maximum amount versus some other sources of capital
Missed payments could ruin your personal credit
Seek out angel investors
What it means
Angel investors are high net worth individuals who invest money in business ventures. They can invest on their own or pool their money with other angel investors. They invest in return for equity in the business or convertible debt, which is debt that can be converted into shares in the company.
Angel investors are a popular source of financing for startups, since they focus on the strength of the individual entrepreneur and business plan rather than personal credit history. Angel investments on average range from $25,000 USD to $100,000 USD.
How to do it
Angel investors are taking a high risk investing in your business, so they need to be ensured that it's a good risk to take. That means they'll want to see drive, motivation, persistence and intelligence from you as an individual, and a solid plan for your business.
While your business plan will be crucial in securing angel investors, they're also busy people, which means you need to work on your elevator pitch. Work on condensing your business plan to a brief presentation that communicates your value proposition, the demand for your product or service and your growth strategy. You should also consider making a slide deck to go along with your elevator pitch.
Because they're taking a big risk, angel investors also expect a big return (in the neighborhood of 20–30%), so demonstrate how their investment will generate that return. You also need to present a sound exit strategy.
Pros and cons
Potential for large amounts of capital
Focus on character of entrepreneur and solidity of business plan rather than credit history
You'll be giving up equity in your business
Competition for angel investment funds is fierce
Angel investors expect a high rate of return
Pitch to venture capitalists
What it means
Venture capitalists represent groups of investors who pool their money to purchase equity in new business ventures. They differ from angel investors in that angel investors are investing their own personal funds, whereas venture capital firms represent investors.
Venture capitalists also typically invest larger amounts than angel investors. As we mentioned before, an individual angel investor may invest $25,000 USD to $100,000 USD, while the average venture capital investment is $7 million USD.
Venture capitalists are also generally more involved than angel investors. An angel investor may offer help and support to an entrepreneur, but this depends on the entrepreneur's and angel investor's own preferences. Venture capitalists, however, are actively involved in providing guidance, advice and support to the startups they fund.
How to do it
It's tough to get the attention of a venture capital firm. VCs are flooded with funding requests from startups, so they have to be picky about the ones they pursue.
VCs tend to focus on tech-based startups, and particularly startups developing software as a service (SaaS) products. They're also attracted to past success, so they lean towards successful serial entrepreneurs.
One of the most difficult parts of securing venture capital is to get on a VC's radar to begin with. The best way to do this is through a personal introduction by a trusted mutual associate.
If you're lucky enough to get the attention of a VC, you'll need a good elevator pitch and a well-crafted business plan. If they like what they see, you'll work with them (and lawyers) to craft a term sheet. This sets out the terms of the VC's investment. It basically entails what they expect to receive in return for their money.
A term sheet will likely include details like the way the VC's equity stake will be structured, their rights to control of the company via seats on the board of directors, their rights to participating in future funding rounds, the valuation of the company and what happens upon sale or liquidation of the company.
Pros and cons
Large amounts of capital
Guidance and support for growing your business
Gives up equity in your business
Relinquishes control of some parts of your business
Very difficult to secure
Crowdfund your idea
What it means
Crowdfunding is raising funds from a large group of people, usually using an online platform. It relies on securing small amounts from a large number of individuals.
There are a couple different types of crowdfunding, and each comes with its own challenges. First, there's donation and reward crowdfunding. This practice lays out your entrepreneurial vision and asks people to donate to help you achieve it. At certain levels of donation, rewards are offered. This could be the product you're developing or access to the service you're selling.
The second type of crowdfunding is investment crowdfunding. In this method, you're offering people an equity stake in your business proportionate to their investment, or a share of the revenue.
How to do it
There are a number of online platforms for crowdfunding. It's important, though, to be clear about the challenges involved.
Donation and reward crowdfunding is usually a make or break scenario. Your crowdfunding campaign has a certain goal, and if you don't hit it you don't end up with any funds. It's a risky venture.
Another challenge presented by donation and reward crowdfunding is fulfilling all the orders if you do hit your goal. If you're using the funds to develop a product and offering that product as a reward, you need to be certain you can deliver the product to participants in a reasonable timeframe, and that the product delivers on what you promised.
Investment crowdfunding presents its own legal challenges. Because you're offering people equity in your business, you'll have to fill out some paperwork. You'll file what's known as a Form C, which is required of any company raising capital through equity crowdfunding. Depending on the platform you choose, investment crowdfunding can also be a binary outcome. Either you hit your goal and receive funding, or you miss your goal and receive nothing.
Crowdfunding platform comparison
Kickstarter
Indiegogo
Crowdfunder
SeedInvest
Pros and cons
Provides easy access to willing investors
Some platforms help manage payments from investors
Some platforms help with marketing, manufacturing and fulfillment
Some platforms are an all-or-nothing funding model
Some platforms are geared towards more mature startups
Turn to friends and family
What it means
Pitch your vision to people you already know to raise capital for your business. You can offer them an equity stake in return for their investment.<