Startup Business Funding Options Compared

Written by Banks Editorial Team
7 min. read
Written by Banks Editorial Team
7 min. read

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If you are ready to launch your startup business, it’s important to do your research and understand what costs will be involved. In fact, comparing startup business funding options may be just as important to your success as the business concept you want to pursue. This guide can help you get started and uncover ways to secure a startup business loan quickly, so you don’t have to wait to get started.

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The Startup Business in the U.S.

The startup business in the U.S. is thriving. The so-called “great resignation” prompted millions of workers to quit their jobs during the COVID-19 pandemic, but it’s not always for another job. Budding entrepreneurs are taking the opportunity to pursue their dreams and aspirations in record numbers. The U.S. Census Bureau reports there were 5.4 million small business applications in 2021. According to Small Business Trends, most startups (69%) begin in the homes of their founders. More than half of startup businesses (58%) have less than $25,000 to work with at inception, and one in three begin their small business with less than $5,000, which might be why the U.S. Bureau of Labor Statistics estimates that 20% of startups fail in the first year. However, a startup business loan before launching your business idea could be key to its success.

Things To Consider Before Getting Startup Business Funding

Have you ever asked yourself, “How do I get my startup funded?” 

It’s an especially common question among entrepreneurs with ideas for businesses, but you should resist the urge to put early expenses on your credit card or get a personal loan. Here are things to consider before getting startup business funding:

Determine How Much You Need (and Can Afford to Pay)

Figuring out how much money you need could be a challenge, but don’t let your excitement for your business overshadow this important step. Careful planning is essential so you don’t borrow more than you can afford to pay. Your lender can work with you once you have an estimate of how much startup funding you need. Be sure to include one-time and ongoing costs, as well as all essential and optional expenses in your estimate. Some common startup costs include rent, office furniture, website costs, advertising, permits and insurance, staffing, technology support, and supplies.

Build Your Credit Score

Many funding options require a “good” or even “excellent” credit score. That means you need at least 670 on a scale of 300 to 850. Since your startup doesn’t qualify for financing from some lenders that require you to be in business for more than two years, they may weigh your creditworthiness more heavily than other factors. To prepare, you should do what you can to boost your credit score, including paying bills on time, monitoring your credit report, and making sure not to open new lines of credit while you are hoping to get startup financing.

Prepare a Business Plan and Financial Projections

Creating a business plan has two main benefits. First, the process of documenting your business strategy can help you create a startup business that is poised to succeed. Second, a business plan will help traditional banking institutions, online lenders, and other financing organizations determine whether you present a good risk for their funding. A solid business plan contains a summary of your startup business, a description of your products and services, a brief biography of your related business experience, market analysis and description of the competition in your market, a specific funding request with sales goals, and any other financial projections you can provide.

Do Market Research

Any lender will want to know that you have done market research before approving you for funding. Understanding the competition is essential, but you should also know if customers are demanding your product or service. For example, if you want to sell dog food, is the product unique? Are the ingredients healthy? How many options for dog food do customers have in your location? Will you be capable of taking online orders with secure checkout and be able to make deliveries locally? These are just a few of the questions you will need to address before launching your startup.

Have a Contingency Plan

Ensure you have a contingency plan for your business so you are able to pivot to expand your product line or tailor your business to meet customer demand if necessary. Also, if you are unable to qualify for funding from your first choice, you should have a contingency plan for alternative financing.

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How Can Funding Help Your Startup Business?

Here are several ways funding can help your startup business:

  • Accelerated Business Growth is essential to the success of your startup, and having the right financing can give you that advantage.
  • Greater Working Capital gives you more flexibility to make business decisions if you have the cash to carry out your plans.
  • It provides a Competitive Edge since startup funding gives you the opportunity to pivot quickly and offer better solutions than the competition can.
  • Increased Sales and Cash Flow. It goes without saying that increased sales and cash flow are the top goals of any business venture, especially a startup business. You need to demonstrate to lenders that your business can succeed, and sales are the main way you will accomplish that.

Options for Startup Business Financing

Your options for startup business financing will depend on many different factors. Some lenders are willing to take on the risk of loaning money to entrepreneurs with great ideas, and some will require a long list of qualifications before offering a loan program. Which funding is best for startups? The secret is to find a lender you can build a long-term relationship with that will support you as your startup grows over time. You may need to provide collateral for certain types of startup business financing, such as inventory, vehicles, equipment, and property. Understanding the pros and cons of options for startup business financing can help you decide. You might consider working with an online lending marketplace, such as National Business Capital, which can help you find the right funding option for your startup. Here are several types of financing options you can compare:

Traditional Bank Loans

Traditional bank loans are typically available to small business owners who can demonstrate a solid track record in business. For example, you may be required to be in business for at least two years and be able to prove strong revenues and profits. These types of requirements may eliminate your startup business from consideration for financing unless you have had success with past business ventures. Furthermore, in order to qualify for traditional bank loans, you will need a good credit score between 670 and 739 on a scale of 300 to 850. 

SBA Loans

SBA loans are small business administration loans guaranteed by the U.S. Small Business Administration. While most SBA loans are used by established small businesses with strong personal credit history and revenues, you can also get an SBA loan for startups. Similar to a microloan, a startup SBA loan offers up to $50,000. The Small Business Administration estimates its average microloan is about $13,000 and is available to small businesses that want to start up or expand. You may be required to offer collateral the lender can seize if you don’t make payments agreed upon at the time of the loan.

Microloans

As the name implies, microloans are usually short-term loans for smaller amounts, typically $50,000 or less. In other words, microloans may be ideal for your startup business if you plan on borrowing a smaller amount. Depending on the lender, you may have up to 10 years to repay the microloan. One good thing about microloans is that you can secure them from a variety of sources, including the traditional banks via the U.S. Small Business Administration, local nonprofit organizations, and online lenders. Women, veterans, or minority entrepreneurs may qualify for microloans more easily than others who might apply.

Community Development Finance Institutions

If you are planning your startup in a low-income community, you might consider seeking funding from a community development finance institution. That type of lender has a mission to offer to finance rural, urban, Native, and other communities that may not be considered for mainstream funding from traditional banks and credit unions. If you and your organization are eligible for this type of funding, you could qualify for lower interest rates and longer terms for your startup loan. However, you might also be required to take a business class or receive business coaching. 

Venture Capitalists

If you are unable to secure funding from more traditional sources, you may turn to venture capitalists for financing. They are usually wealthy investors, investment banks, and other financial institutions looking to invest in startups or other small businesses. Venture capital is money for startup businesses that venture capitalists believe have growth potential. The potential for above-average returns makes venture capitalists willing to assume more risk. In exchange for funding, you may have to offer venture capitalists the ability to help make business decisions, which many entrepreneurs are unwilling to do. However, it may be worthwhile because you could benefit for years to come from the expertise and insights venture capitalists have to offer.

Partner Financing

Think of partner financing as collaborating with a larger, more experienced company in the same industry. They are willing to provide funding to help you get started because they see the potential for mutually beneficial collaboration in the future. The incentive for the partner is that they see your product or service as essential to their growth in the future, and in exchange, they will share resources with you now. Partner funding is not a loan like a venture capital, but your funding partner may request a percentage of every sale or a royalty on total sales.

Angel Investors

You might consider seeking funding for your startup from an angel investor who can provide money for your business without assuming any decision-making responsibilities or privileges. Angel investors typically offer you their own cash to help you carry out your business idea in exchange for equity in the business. Angel investors will usually evaluate your new business concept and estimate the value of your venture before deciding to commit to funding your startup. You may find angel investors by networking either in person or online.

Crowdfunding

One option for business financing that’s growing in popularity is crowdfunding, where you raise money for your business venture by asking individuals and organizations to contribute online. It can be an inexpensive way to raise the funds you need and also give you an effective way to introduce your product or service to prospective customers using social media. When you are ready to start raising funds, there are many platforms to choose from. Simply create a business profile, determine your crowdfunding goal and publish your request online. Increase your success by offering donors a gift or discount on future purchases. Potential benefits of crowdfunding are that you do not need to pay interest on the money raised or be expected to pay back any funds raised.

Small Business Grants

Unlike traditional business loans, small business grants do not need to be repaid. You may be able to get a small business grant from a wide range of sources, including private companies and government agencies. These types of grants aim to provide financial support to entrepreneurs and startup businesses. The benefit, of course, is that it’s a grant, but the potential downside is that it may take a lot of time and effort to find a source for the funding. Every grant-making organization has its own requirements and application process. For example, there may be different requirements for the number of employees in a company. It’s important to study qualifications to see which small business grant is best for your startup.

Where To Get Funding for Your Startup Business

In addition to all the startup business loans already mentioned, you may want to explore quick and easy funding from an online lending marketplace. National Business Capital partners with more than 75 lenders to provide funding for your startup. Some of the more popular financing options include:

  • Small business loans for all industries
  • Business lines of credit work like a business credit card you can use as needed for your startup
  • Equipment financing for new or used equipment

National Business Capital has a simple online application that will not affect your credit score. So get started with their easy online application today.

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