When starting a business, entrepreneurs face the important question of where to get the money to make their ideas happen.
Getting funds is a big step for any new company.
In this guide, we’ll look into the most common sources that business owners turn to for financial support.
Let’s begin!
What Is the Most Common Source of Funds for Entrepreneurs
The most common sources of business startup capital include personal savings, family and friends, bank loans, angel investors, venture capital, crowdfunding, small business grants, business incubators and accelerators, self-funding, and revenue financing.
Entrepreneurs may also explore other options like business competitions, corporate partnerships, or government programs. Factors such as the type of business, estimated growth, risk tolerance, and capital accessibility are crucial in determining funding sources.
1. Personal Savings
When starting a new business, many entrepreneurs turn to their personal savings as the primary funding source.
This method is often preferred because it gives the business owner full control without the need to borrow money or give up equity to investors.
According to Census Bureau data, approximately 40% of companies use personal savings as their primary source of startup capital.
Using one’s own savings to fund a business means not having to pay interest on loans, which can save money in the long run.
However, it’s also a risk because if the business does not succeed, you could lose your personal funds.
2. Friends and Family
Friends and family are another group individuals turn to when seeking financial support for a new business venture.
This type of funding is popular because it involves people who already know and trust the entrepreneur.
They may be willing to invest because of their relationship and belief in the person’s ability to succeed.
It’s also seen as a way to avoid high interest rates from bank loans or giving up equity to venture capitalists.
Personal or family assets and personal savings are familiar sources of startup capital for new businesses. Personal savings offer accessibility without collateral or approval from external parties. In contrast, leveraging personal or family assets involves using assets like real estate or retirement savings as collateral for financing, potentially providing access to more significant funding.
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However, it carries the risk of losing assets if the business fails. Overall, personal savings are more straightforward and less risky, while leveraging assets may offer more significant funding potential but require careful consideration of risks and complexities.
You should consider the potential impact on personal relationships that businesses face when facing financial difficulties.
3. Business Loans
Business loans are a common source of funds for entrepreneurs looking to start or grow their businesses.
They are sums of money borrowed from financial institutions, like banks or credit unions, which must be paid back with interest over time.
For many business owners, loans are essential because they provide the necessary capital to invest in inventory and equipment and hire employees.
Getting a loan usually requires a solid business plan, a good credit score, and sometimes collateral to secure the loan.
Bank or financial institution loans for businesses often have lower interest rates, but because of the stricter eligibility requirements, they may be more challenging to obtain.
Alternative funding sources like online lenders provide faster approval but often come with higher interest rates and fees. Businesses should consider their financial needs and creditworthiness when choosing between these options.
New businesses face numerous challenges when seeking bank loans. These include limited financial history, lack of collateral, perceived higher risk, cash flow issues, personal credit history, extensive documentation requirements, higher interest rates, and regulatory compliance.
Due to the COVID-19 pandemic, small businesses experienced a notable impact on the availability of federal grants. Different initiatives aimed at providing support were implemented, among them the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.
However, fluctuations in funding levels and high demand led to temporary shortages and delays in processing applications. Despite challenges, government efforts aimed to provide financial assistance to help businesses cope with the economic impacts of the pandemic.
These factors make it difficult for new businesses to qualify for loans and may require innovative strategies or alternative financing options to meet their capital needs.
4. Angel Investors
Angel offers financial support to startups and entrepreneurs, often in exchange for equity in the company.
They are typically affluent people who want to invest in promising businesses at their early stages.
Unlike loans from a bank, angel investors don’t require repayment in the traditional sense.
What they look for in return is a piece of the business, which could become very valuable if the company succeeds.
This source of funding is common for new companies that don’t have enough history or revenue to get loans from banks or to attract larger investors.
5. Venture Capital
It is essential for entrepreneurs who have a unique business idea but need funding to bring it to life.
It is a type of investment where investors give money to startup companies that they believe have long-term growth potential.
In return for the funding, the investors usually get ownership of the company and a say in business decisions.
Venture capital is a common source of funds for businesses that are too risky for traditional banks or don’t have a long financial history to get a loan.
6. Crowdfunding
This process is done via online crowdfunding platforms where the entrepreneur will set up a campaign, outlining their business idea and the funding goal.
Regular individuals can then contribute financially, often in exchange for some form of reward, like early access to the product or a special thank-you gift.
This approach has the advantage of securing funding validating the business idea and gaining a base of initial supporters who are invested in the success of the project.
7. Government Grants
Government grants are a form of financial assistance that entrepreneurs may leverage to start or expand their businesses.
These grants are often awarded to support initiatives in specific industries, and regions, or to promote innovation and economic growth.
Grants do not require repayment, which makes them a highly attractive funding source for business owners.
However, they can be competitive and often come with stipulations on how the funds must be used.
Entrepreneurs looking to secure a grant must go through an application process, outlining how their business aligns with the grant’s objectives.
8. Business Incubators and Accelerators
They help startups to grow by providing resources such as office space, mentorship, and sometimes even funding.
While incubators focus on nurturing businesses with long-term support, accelerators are more intensive and aim to speed up a startup’s growth within a few months.
Often, they invest a small amount of capital in exchange for equity in the company.
By joining these programs, you gain access to a network of investors, experienced mentors, and other startups.
9. Credit Cards
Credit cards are also a common source of funding for entrepreneurs, especially when starting a small business.
They can be easy to use because many people already have them and are familiar with how they work.
When an entrepreneur doesn’t have enough cash on hand or want to keep their savings intact, they might use a credit card to pay for business expenses.
While credit cards are quick and convenient, you should use them wisely because the interest rates can be high if the balance isn’t paid off quickly.
Using personal credit cards for business funding has drawbacks: high-interest rates, accounting complications, limited personal credit capacity, personal liability, and lack of business credit building.
This means the cost of borrowing money can add up, but credit cards can be a helpful tool for short-term needs.
Overall, relying on personal credit cards may not be suitable for sustainable business growth.
Business credit cards, tailored for business expenses, offer higher credit limits, rewards aligned with business spending, expense tracking, liability protection, and help build business credit. In contrast, personal credit cards lack these tailored features, hold the cardholder personally liable, and do not contribute to building business credit.
Business credit cards provide distinct advantages for managing and growing a business.
10. Microloans
Microloans are small loans given to entrepreneurs who might not qualify for traditional bank loans.
They’re popular among small business owners, especially in developing countries or among those starting up with less capital.
These loans can provide the financial support needed to buy supplies, and equipment, or fund other essential business activities.
They are often provided by non-profit organizations or specialized microfinance institutions.
This focuses on helping individuals who are starting out and need a small boost to get their business ideas off the ground.
11. Bootstrapping
This involves starting and growing a business using limited resources, typically personal finances, without seeking external funding.
Entrepreneurs who bootstrap are often very resourceful, cutting unnecessary costs, and reinvesting profits back into the business to support its growth.
This method is one of the most common sources of funds for new entrepreneurs because it allows them to maintain full control over their businesses.
12. Product Pre-Sales
When entrepreneurs are looking to fund their business ventures, they often turn to pre-sales of their products. This means they sell their product before it is actually made.
This approach is common in the world of crowdfunding, where entrepreneurs present their ideas to the public and ask for purchases or donations ahead of time.
Exciting people about their creation, entrepreneurs can gather funds through pre-orders to bring their products to life.
This kind of funding can be really helpful because it also shows that there’s a real demand for what they’re planning to sell.
13. Strategic Partnerships
They involve teaming up with other businesses or individuals that have aligned interests and can offer support beyond the capital.
This might include sharing resources, knowledge, and networks, which can help a new business grow and succeed.
Partners often invest in the venture because both parties stand to benefit from the success of the startup.
In these collaborations, not only is money exchanged, but also valuable industry insights and access to a broader customer base.
14. Equity Crowdfunding
Equity crowdfunding is a way for entrepreneurs to get money for their businesses by asking a lot of people for small amounts of investment.
Instead of getting a loan or selling products, they offer shares of their company. This means if the company does well, the investors could make money too.
It’s popular because it’s a way for regular people to invest in new companies, not just rich people or big investment firms.
15. Convertible Notes
These financial instruments are essentially loans that can be turned into equity, or shares of the company, later on.
They’re often used because they are less complex and quicker to arrange than a traditional equity investment.
This matters a lot in the fast-paced start-up world where time is precious and opportunities are fleeting.
Investors lend money to the start-up with the understanding that their loans will convert to equity during a future financing round.
16. Royalty Financing
In this arrangement, the business owner gets the funds they need to grow their business without giving up any ownership stakes.
Instead, they agree to pay the investor a certain amount of money based on the sales they make, which is often referred to as a royalty.
This can be an attractive option for entrepreneurs because it allows them to maintain control over their company while still accessing the funds they need to expand.
17. Trade Credit
When suppliers offer trade credit, they allow the business to pay for the goods at a later date, instead of immediately at the time of purchase.
This arrangement can help entrepreneurs manage their cash flow better, as they can sell their products to their customers before they have to pay their suppliers.
This type of financing is helpful because it’s often easier to obtain than bank loans and can be more flexible.
Trade credit can be a lifeline for startups and small businesses that are still establishing their creditworthiness and do not have large amounts of capital.
