How to Get Start-Up Funding for Your Business
You’ve got a fabulous idea for a business. You’ve done your research, a bit of market testing, and you’re ready to launch your venture. All that’s left to do is source start-up funding. And that may be where you hit some roadblocks.
It can be challenging to get funding for a new business, but you can make it a reality if you know where to look.
Do This Before You Apply
If you haven't done so yet, these are steps to take before you apply to ensure your business has the highest chance of approval:
- Open a business bank account
- Check your credit scores
- Incorporate your company as a legal entity
- Obtain any required state and federal licenses for your industry.
- Request an Employer Identification Number (EIN)
Most importantly, determine how much you need to start your business. It may be less than you think: only 12% of businesses start with more than $250,000 in capital funds and a third of people start with less than $10,000.
Here are the top places where you may be able to find the funding you need.
Small Business Credit Card
If you have a solid personal credit score, you may be able to qualify for a business credit card even if your business is brand new. Most issuers make the decision to approve applications based on the owner’s personal credit scores and income from any source (not just business revenues).
It’s best to avoid using your personal credit cards for your business. Debt on personal credit cards always impacts your personal credit scores and mixing personal and business purchases can create accounting hassles.
Many small business credit cards do not report to your personal credit unless you default. If you carry a balance on one of these cards, that balance won’t impact your scores as long as you pay on time.
Keeping your personal credit card balances low is important because a high debt usage (“utilization”) ratio can lower your personal credit scores.
About three in four small businesses get funding from personal sources, including:
Family and Friends
If you don’t have sufficient savings, you may turn to friends and family for funding. If you’re fortunate enough to have a support system willing and able to help you launch your venture, they may be your best shot.
There’s no guarantee your business will be successful, so be careful to minimize harm to these relationships.
Don’t ask for money from someone you know cannot afford to lose it. Try asking for smaller amounts from multiple people, rather than a large sum from just one individual.
Provide family and friends with a professional business plan and pitch your idea just like you would a group of professionals. Include your plan to pay back the loan and create a legal agreement spelling out the terms of the loan. Also, decide if you want them to loan money to your business, or if you'll offer shares in your company in exchange for their backing. If you offer an investment opportunity, talk with an attorney as legal requirements must be met.
You may be able to borrow against your 401(k) or 403(b) retirement account to fund your business. You can’t borrow against an IRA. But you may be able to purchase a business—including a franchise—using a Rollover for Small Business (ROBS).
Get advice from a tax professional if you decide to use retirement funds for your business. If you fail to follow IRS guidelines, you could wind up owing taxes and penalties.
Think carefully before using retirement funds to fund your business. Federal Reserve research has found that the majority of Americans do not feel they are on track with their retirement savings. Starting a business is risky and using these funds could jeopardize savings you will need later in life.
A microloan is a small loan, usually for less than $50,000 though some microloan programs lend up to $250,000. Many microloans are made through non-profit organizations, often in partnership with banks or credit unions. In addition, many of these programs are designed to serve entrepreneurs who might otherwise have trouble accessing credit.
Here are three popular microloan programs to consider:
The SBA Microloan Program is designed for business owners who have trouble getting financing, including new businesses. If you qualify, you may be able to borrow up to $50,000, but the average start-up loan is approximately $13,000. You can use the funds for any of the following.
- Working capital
- Inventory and supplies
- Furniture and fixtures
- Machinery and equipment
The SBA doesn’t make loans; they guarantee them.
The SBA works with approved lenders, so your loan repayment terms vary according to your lender and several other factors:
- Your loan amount
- What you’ll use the funds for
- Your lender’s requirements
- Your needs
Rates on these loans are usually between 8%-13%. Six years is the maximum amount of time to repay the loan. Your lender will determine your repayment term.
In the U.S., Accion is the largest nationwide non-profit lender. They’re one of the few lenders that offer start-up loans.
Accion will take your application online, over the phone, or in person. Credit requirements vary depending on your location, but the minimum personal credit score required is often 575 and above. They currently offer low fixed rates between 7% and 34%.
Depending on where you live, you may not qualify if you have had a bankruptcy in the past year, your bills must be current, and you’ll need to have the cash flow available to repay the loan. Your cash flow can come from a job with verifiable income if your business hasn’t launched yet. You’ll also need a solid business plan.
Other sources for microloans include Kiva.org, local economic development organizations and Community Development Financial Institutions (CDFIs). You may be able to find local microloan programs through your Small Business Development Center (SBDC) or SCORE, two organizations funded by Congress to help entrepreneurs.
SBA. "Dissecting Access to Capital," Accessed Oct. 31, 2019.
IRS. "Considering a Loan From Your 401(k) Plan?" Accessed Oct. 31, 2019.
IRS. "Retirement Plans FAQs regarding IRAs Loans," Accessed Oct. 31, 2019.
IRS. "Rollovers as Business Start-Ups Compliance Project," Accessed Oct. 31, 2019.
Federal Reserve. "Report on the Economic Well-Being of U.S. Households in 2018," Page 48. Accessed Oct. 31, 2019.
SBA. "Loans & Grants," Accessed Oct. 31, 2019.