The 5 Best Options You Have to Fund a Startup

How will you raise the funds your startup needs to succeed?

Business people reviewing proofs on floor in office
Hero Images/Getty Images

When you’re trying to build a startup from scratch, getting excited is the easy part.

When you enter the planning phase, you already have a solid idea, tons of motivation, and a limitless imagination for the possibilities that lay before you. You have thoughts about your hiring process, plans for how your company might develop after a year or two, and boundless excitement for being your own boss and calling your own shots.

There’s only one thing holding you back from all of it: money.

The unfortunate reality of entrepreneurship is that it’s almost impossible to truly start a business from scratch. Even with an original idea and no previous experience or current help, you’ll still need an injection of working capital if you want to get things moving. You might have to purchase equipment, make a deposit for an office, hire a first round of employees, invest in marketing, or pay for some combination of other expenditures, but you will have to pay for something, and for that, you’ll need money.

So where does this money come from? If you want to get your startup off the ground, you have five primary options.

1. Self-Funding.

Self-funding is the process of drumming up capital on your own. You might tap into an investment account, your personal savings, or even secure a second home loan to come up with the capital. You can even ask your friends and relatives to chip in if you feel comfortable doing so.

The advantage here is that you’ll retain complete control over your business and you won’t be held liable for any loans or pledges, but the flip side is the immense personal financial risk. If you pour your retirement fund into your startup and it doesn’t take off, you’ll be in a tough financial position afterward.

Still, self-funding is a very reasonable option for low-cost startups like sole proprietorships that don’t require an exorbitant amount of working capital up front.

2. Crowdfunding.

Crowdfunding is a relatively recent development in business funding trends, but you need to be careful how you use it. Platforms like Kickstarter and Indiegogo are readily available and easy to use, but that doesn’t mean just anybody can use them. Some platforms have specific requirements, such as Kickstarter’s mandate that you must be producing a tangible product and that you can only accept the money if you reach a specific goal. You’ll also pay a percentage of your micro-investments back to the platform where you earned them, and equity crowdfunding is a complicated, confusing mess of stipulations. Consider crowdfunding as a way to gain significant upfront capital, but don’t count on it as an instant and guaranteed way to cover all your capital needs.

3. Individual Investors.

Venture capitalists and angel investors will often fund your startup out of self-interest—if they believe in your idea and your business, they’ll give you money upfront in exchange for the promise of higher returns down the line. Venture capitalists tend to work as larger firms, investing in larger, more established startups, while angel investors work individually to fund startups at any stage of the process.

Here, you’ll be guaranteed a sum of startup capital and even some practical guidance and mentorship along the way. There are only two major downsides: first, you’ll have to give up some degree of control, and possibly a percentage of your ownership in the company. Second, it might take a long time and a ton of effort to find an investor willing to partake in your venture.

4. Small Business Loans.

Small business loans are relatively common at multiple levels of government, and a few quick Google searches should help you find some opportunities to take advantage of in your area. According to the SBA, securing a small business loan is a relatively simple process, but again, you’ll have to be aware of certain stipulations.

Most of the time, you’ll be expected to pay back the loan with significant interest, like any other major loan, and there may be requirements about how you do business. Furthermore, if you want to secure a loan, your personal credit will have to be in good standing.

5. Lines of Credit.

Last but not least, you can open a line of credit with a bank or major financial institution to help your business get going. With only an idea to go on, don’t expect a high credit limit or low interest rates—the more established your business becomes, the better the terms of your credit will become. You can also open multiple credit cards in your business’s name to get things started—just be aware of your interest rates at all times, and don’t bite off more than you can proverbially chew.

None of these options are inherently better than any of the others; there are unique advantages and disadvantages to each, and you’d do well to remember that. For example, you might avoid complicated terms or harsh interest rates associated with a line of credit by personally investing, but you’ll also put yourself at personal financial risk.

Your best bet, and the way most entrepreneurs ultimately choose to go, is to seek the best of multiple worlds by acquiring capital through multiple channels. This will limit your liabilities and give you a safety net in case your primary source of capital ever fails—for any reason.