The Best Funding Options for Startups

The decision to seek outside funding options for a new small business shouldn’t be made lightly, but it’s a direction many business owners go when their needs are greater than the capital they have on hand.

Securing funding for a startup is a different process—with different options—than when you seek funding for an established business. You may not yet qualify for the best terms or largest loans, and the opportunities will be more competitive.

That said, many lenders and organizations offer different startup funding options. Your job will be to understand which, if any, is the best option for you and your new business.

Here’s a rundown of the best funding options for startups, with explanations of how each product might impact you.

Funding Options: Small business startup loans

Loans are available to new businesses—those that started up six months ago or less—in the form of startup loans.

Typically, startup loans are for smaller amounts than traditional business loans, and they may require you to meet more stringent personal qualifications, such as good personal credit. This is because startups lack the business history and proof of revenue of established businesses.

The terms for these loans vary depending on the lender, your financial situation, and the business you’re funding.

Startup loans take different forms, including:

Funding Options: SBA microloans

The Small Business Administration has a microloans program that focuses on providing funding options to startups and small businesses—many run by women, minorities, or veterans—through intermediary nonprofit lenders. If you qualify for an SBA loan, it’s perhaps the most affordable financing on the market.

SBA microloans are capped at $50,000, though they can be for as little as $500. The average microloan is for about $13,000. Repayment of an SBA microloan can take no more than six years, and interest rates run between 8%-13%. The funding process may take several weeks.

Eligibility for one of these loans is dependent on a few factors, though it varies by lender:

  • You must own a for-profit small business.
  • The loan can be used for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment. It may not be used to pay off existing debt or to purchase real estate.
  • You need at least decent personal credit—575 is the average minimum credit score.
  • A detailed business plan is necessary that outlines your ability to repay the loan.
  • It’s possible you may need to sign a personal guarantee and offer assets as collateral.
  • You may need to demonstrate “good character,” which sometimes (but not always) means having no criminal record.

The SBA has a variety of loan options, but their microloans program is the best fit for a startup at this time.

Funding Options:Alternative microlenders

The SBA isn’t the only microlender: There are a number of microlending institutions, many of which receive funding from local governments, philanthropies, and even through crowdfunding options.

Depending on your needs, as well as other factors such as where you live, you can apply for a microloan from organizations such as Accion USA, PayPal Working Capital, Grameen America, and LiftFund. Other models that require a bit of crowdfunding on your part include Kiva and TrustLeaf.

Funding Options: Business credit cards

A good business credit card is arguably a must-have tool for small business owners, especially considering it can work as a form of short-term financing when in a bind.

There are a few standout benefits to business credit cards as a form of funding options:

  • They are easier to qualify for than a small business loan.
  • These cards are a revolving form of credit that you can draw on and repay as needed.
  • They don’t require collateral.
  • Some may come with a 0% APR introductory rate, which acts as a kind of interest-free loan through the life of the offer. (Once the APR kicks back in, a typical rate ranges from 14%-19%.)
  • They often come with perks like reward points and customizable cash back categories you can use to erase purchases of office supplies or other resources.

You’ll want a business credit card that reports to business credit bureaus, not personal credit bureaus, so you can start building your business credit score in anticipation of a larger term loan down the line, if necessary.

Be sure to pay off your credit card bill in full each month, and to never borrow more than you can afford to pay back.   

Funding Options: Invoice financing

If your small business is a B2B business and has been operating for at least three months, you might explore invoice financing.

B2B businesses often have their money tied up while waiting for unpaid invoices to come through, which can lead to cash flow issues.

Invoice financing, also known as invoice discounting, is when you borrow money against your outstanding accounts receivables. Once your client pays you, you pay back the lender what they extended to you, plus fees and interest. This is one of the more expensive forms of short-term financing. However, it requires little paperwork, and you can often get funding in as little as one business day. In a pinch, invoice financing may make sense for you.

Funding Options: Small business grants

We would be remiss if we didn’t mention that you can apply for grants from nonprofit or governmental organizations. This is especially true if you have a mission-oriented business or one that meets certain criteria, such as operating in low-income communities.

Keep in mind that grants can be difficult to secure due to immense competition and limited opportunities. They shouldn’t be counted on as a sure form of financing even if you believe you are qualified. But the upside—essentially free money—makes them worth considering.   

Funding Options: Crowdfunding, family, and friends

As mentioned above, there are lenders who combine crowdfunding with lending. They are platforms that require borrowers to raise a certain amount of money from their own community, in order to be considered for a loan.

There are also straightforward crowdfunding platforms like Indiegogo and Kickstarter where businesses can raise capital. You set a capital “goal” you’re trying to hit and give lenders—typically everyday people—the opportunity to fund your concept. This is usually not a form of equity or debt financing. You do not give up ownership in your business or repay your funders with interest.

A similar situation may be worked out with friends and family. Capital may be obtained through these sources without an expectation of paying them back. You may also enter into a loan agreement with them, and offer them equity in the company. Either way, tread carefully, as your personal relationships will be at risk.

Securing these funding options for your startup is a major step. Do it with the goal of increasing your ROI or adding value to your business. Borrow only as much as you need, when you need it.

Eventually, other financing options will open up to you, with more generous terms. For now, if your startup needs financing options, consider these avenues as the most tried-and-true methods.

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.