Business Funding Options: How to Finance Your First Business

The benefits of entrepreneurialism are tempting: freedom and flexibility, a chance to profit off your own hard work, and potential rewards far beyond those possible by way of a conventional career. But launching a new venture takes start-up capital and pulling together enough money to give yourself a practical runway can be a challenge. Here are the main routes that others have used to succeed:

What Are the First Steps to Start a Business?

Before you compare business funding options, do the groundwork that decides which of them are open to you. Lenders, investors, and grant committees all ask versions of the same questions, so the work you do here gets reused with every application.

Take control of your money, optimize your spending and grow your savings automatically

• Know your number. Add up start-up costs (equipment, licenses and permits, website, inventory), several months of operating expenses (rent, utilities, production, delivery, taxes), pay for yourself, and a contingency buffer. Ask for what you actually need, not the bare minimum.
• Work out your runway. Divide the cash you can put in by your monthly burn to see how many months you can operate before the business has to pay for itself. Our guide to calculating your financial runway walks through the math.
• Write the plan. A realistic business plan with cash flow projections is the single document every funding route requires. Exaggerated income forecasts are the fastest way to lose a lender.
• Check your credit report and score. Personal credit follows you into business borrowing, especially in the first few years. Give yourself months, not days, to fix errors and pay down balances.
• Separate personal and business money. Open a dedicated account before the first expense hits, so you always know how much you’ve actually invested.
• Get proof of concept. People committed to buying, not just expressing interest. It shortens every funding conversation you’ll have.

Go to the Bank

You need money; banks have money. It’s a match made in heaven . . . maybe. You can make an appointment with a bank or lender, but it’s going to take some work up front. You’ll also want to carefully weigh the pros and cons.

Bank funding requires collateral and a convincing business plan. You have to convince the lender that you’ll be able to pay the money back, and your business is likely to make money in the first place. That means you have demonstrable expertise, you’ve invested in crafting a professional, detailed business plan that you can share, and you already own something of value (usually a house). It also means that you’re gambling against your future, and if your business fails, or fails to grow and produce a profit fast enough, you stand to lose a lot.

There’s also the interest to consider. Credit and bank loans usually require regular payments against the loan, and the interest keeps accruing until the whole thing is paid off — meaning you’re paying extra for the privilege of having the money now. It works like your credit card; you don’t have to pay it all off now, but it costs you more the longer you stall, and you do have to keep up a minimum payment.

Lenders assess every applicant against roughly the same five criteria, so it’s worth knowing what they’re scoring:

• Capacity — can the business generate enough cash to cover repayments?
• Capital — how much of your own money is already in the business?
• Collateral — what can be sold if the business defaults?
• Conditions — do market and economic timing favor this venture right now?
• Character — credit history, industry experience, track record.

A “no” from one bank isn’t a “no” from all of them. Each lender weights those five differently, and traditional banks are usually the strictest — many want two to three years of proven profitability before they’ll lend at all.

Taking out a loan to fund your start-up is a risk, and you should limit risk unless you have a plan to mitigate it. Maybe you have clients or customers lined up and can rely on a steady workload.

Maybe you have lots of equity and can afford to lose some of it without being completely ruined if things go sideways. Maybe you have a business that will start producing and making back money very quickly, and just need the quick up-front cash injection to get started. The great thing about loans is, once you’ve paid them off, they’re done. You still own your business, and you get all the profits of your work from that point onward, so they do hold some appeal over investment loans.

Find Investors

When it comes to investors, things work a bit like a bank loan, except investors generally want an interest in your future success. They may be willing to take a bit more risk than a bank would in order to continue making money off of your work in the long term. An investor often has a specific area of investment they’re interested in, and their expertise in that area may make them more confident that you could succeed than a bank would be. You still need a convincing business plan, but collateral is less of an issue.

Not all investors are the same, and the difference matters at your stage:

• Angel investors invest their own money, move quickly, and usually want simple terms. Many are former founders who bring contacts and mentorship along with the check.
• Venture capitalists invest other people’s money, deal in much larger sums, and run a slower process with more complex terms.
• Equity crowdfunding platforms spread a small raise across many backers, but bring reporting obligations and a cap table full of strangers.

An investor is a critical way for many current start-ups to get off the ground. Ambitious entrepreneurs need large amounts of money to scale up a great business idea, and generally don’t have millions in collateral to self-fund their venture. But they risk losing control of their business to the investors if they get in over their heads, investors may be cautious and take a lot of convincing or refuse to do business, and the long-term profits are distributed among more parties.

You’ll hear a lot about investors from typical Silicon Valley start-ups and shows like Dragon’s Den. If you have a big idea, an untapped market, and expertise without capital, investors can help you gain a foothold and grow at a startling rate. But many investor-funded start-ups don’t know how to scale with rapid growth, don’t deliver on promises, spend too much time and energy chasing investors, or lose control of their idea and business.

Worth remembering: angel investors and VCs both expect an exit. If your goal is a business you own for thirty years, their goal and yours may not match.

Save and Bootstrap

The ideal way to launch a venture is to do it while working at a stable day job. Save up money, self-fund, and grow organically. Use your regular job to cover personal and start-up costs and reinvest profits in your business at first to grow it without outside support. Jan Berkowitz is an entrepreneur who used this technique to great success, launching his first venture — a concrete production business — using his savings, and growing it rapidly.

A few things make bootstrapping far more survivable:

• Keep a separate savings account for the business so you know exactly what you’ve put in each month.
• Keep your personal emergency fund intact. Business savings and emergency savings are not the same pot.
• Take on a side hustle for extra income if your day job’s ceiling is the constraint.
• Spend only on things that bring in income within the next 90 days. Everything else waits.

Self-funding and bootstrapping a venture can be exhausting, and requires a slower, steadier growth pattern than bank or investor-funded launches, but you can keep ownership of your business and your profits, limit risk, and build a more stable, healthier business for the long term. It’s most viable if you can start a business with no money in the first place – service models where your time, not capital, is the main input.

Free Money

There are two things to look into, and they’re worth a bit of effort in return for some (mostly) free cash. Small business and start-up grants are sometimes awarded by regional or special interest groups. If you have some sort of minority or disadvantaged status, a relationship with a funding organization, or live in the right area, you may be able to apply for a grant for your venture.

Crowdfunding is a sort of micro-investment tactic. You sell prospective customers on an idea (product) and they pre-purchase or invest in its eventual production. This can be a savvy marketing and fundraising technique, or a time and energy drain as you chase backers and are pushed to deliver a working product on a set timeline.

Two practical notes on both: grant applications are competitive and usually tied to specific criteria like job creation, research, or sustainability, so check your local chamber of commerce and economic development office before spending weeks on a national scheme. And reward-based crowdfunding income is generally taxable, because unlike a loan it never gets repaid.

Other Business Funding Options Worth Knowing

The four routes above cover most first-time founders, but they aren’t the whole market. If banks say no and you’re not a fit for investors, these are the ways to borrow money most often used to bridge the gap:

• Government-backed loans. In the US, the Small Business Administration guarantees part of the loan for participating lenders, which lets banks approve applicants they’d otherwise decline. SBA microloans come bundled with counseling.
• CDFIs and microlenders. Community development financial institutions and organizations like Kiva or Accion Opportunity Fund lend smaller amounts to founders who don’t clear a bank’s minimums. Rates run higher, but so does the approval rate.
• Friends and family. Often the cheapest money you’ll find, and the easiest to ruin a relationship over. Write it up: amount, interest, payment schedule, final due date.
• Business credit cards and lines of credit. Fast and flexible, and you only pay interest on what you draw. Dangerous as a primary funding source because of the rates.
• Peer-to-peer lending. Online platforms match you directly with individual lenders, usually faster than a bank. Check that the platform is licensed in your state.
• Asset and invoice finance. Spread the cost of equipment over time, or sell unpaid invoices for cash now. Both are secured against something you already have, which makes them easier to qualify for.
• Pension or retirement funds. Possible, but you’re wagering your retirement on your business. Get advice first.

How to Compare Business Funding Options

Four questions separate the right option from the tempting one:

• What does it actually cost? Compare APR, not headline interest rates. APR includes fees, and some lenders quote daily or monthly rates that look smaller than they are.
• How much control do you give up? Debt is repaid and finished. Equity is permanent, and your investors get a say in decisions.
• How fast do you need it? A card or personal loan can land in days; a bank loan or grant can take months.
• What happens if the business fails? With a secured loan, you lose the collateral. With equity, the investor absorbs the loss. Know which one you’re signing up for.

Every funding option has its pros and cons, and your circumstances will limit which options are open to you. Those with a high-risk tolerance, strong collateral, and a compelling business plan might prefer loans or investment to achieve impressive growth quickly. Those with a well-paying day job and an entrepreneurial spirit can take advantage of self-funding and transition into it as a full-time gig when the moment is right. Everyone should investigate grants and consider crowdfunding as part of their strategy. Freedom, flexibility, and long-term rewards are within reach.

FAQ

How much money do I need to start a business?

Enough to cover your start-up costs plus several months of operating expenses, your own pay, and a contingency buffer. If you think you need six months of funding, ask for twelve.

Can I start a business with no money?

Some business models can be launched with almost nothing, particularly service businesses where your time is the main input. The constraint isn’t capital so much as how long you can go without paying yourself.

Do I need good credit to get business funding?

For bank loans, yes — personal credit is part of the assessment for new businesses with no trading history. Grants, crowdfunding, microlenders, and CDFIs are the routes least dependent on your score.

What’s the safest way to fund a first business?

Personal savings, because there’s nothing to repay and no ownership to give away. The trade-off is slower growth and a longer wait before you can quit your job.