Types of startup funding

9 Types of Startup Funding: What’s Right for Your Business?

When you’re looking to grow your startup, you need access to funds. 

The right amount of money at the right time can help you develop your product, hire talented team members, and reach new markets. 

But if you’re new to the startup financing game, your funding options can be confusing. To help lessen that confusion—and increase your growth opportunities—we’ve tried to explain some of those options. Keep reading to see which method of funding is right for you.

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9 types of startup funding to grow your business

Every financing method comes with a unique set of risks and benefits. To help manage your risk—and capitalize on the benefits—you should consider your options carefully and choose several methods that work for your business.

Before looking into any amount of funding from any source, you should take some time to figure out exactly how much money your startup will need.

1. Personal savings

About 50% of small business founders use personal savings to get their startups off the ground. Especially if you’re in the pre-launch phase, responsibly tapping into your personal savings is an easy, convenient way to get your business started. And if your startup costs are low, personal funds are a relatively low-risk source of cash.

Pros: Your personal savings are yours, so there are no strings attached. You don’t have to surrender any control of your business or meet strict loan requirements. 

Cons: If your business fails, you don’t get your money back. Your personal finances will take a hit if anything goes wrong with your startup.

2. Money borrowed from friends and family

About 37% of Americans borrow money from friends and family for various reasons. Of those 88 million people looking to their loved ones for cash, about 4% of them look to their personal networks for funding to start a business.  

Your family and friends might want to offer financial help to see your business succeed.

Pros: The average amount requested from family and friends for startup business funding is around $100. These relatively small cash injections carry smaller risks than larger amounts borrowed from banks. And no matter the amount you’re requesting, family and friends typically offer more relaxed loan terms with fewer restrictions than financial institutions.

The average amount requested from family and friends for startup business funding is around $100. Click To Tweet

Cons: Mixing business and your personal life can be uncomfortable, to say the least. While banks have clear rules for what happens when default on loan payments, friends and family might take your inability to repay them personally. Conversely, if your business takes off and your personal lenders feel they didn’t get a fair return on their investment, that can also be seen as a slight.

Although you can borrow money more easily from friends and family, you should still take an official approach to these friendly loans. Put everything in writing and establish a repayment schedule, any interest you’ll pay, and what your lender will get in return for fronting your startup money. Establishing these terms in writing will help you avoid or mitigate any potential personal disputes down the road.

3. Crowdfunding

Crowdfunding is an increasingly popular option for generating cash for your business. Instead of turning to your personal connections for funding, you can try to reach your potential customers through crowdfunding. In exchange for a certain amount of money, crowd funders can get early access to your product, become beta testers, or receive other rewards and benefits not available to those who didn’t contribute to a crowdfunding campaign.

Pros: Crowdfunding can help you generate much-needed financing to develop your product. The success of a crowdfunding campaign can help you determine your market size and how quickly you might be able to grow your business. And finally, you can create buzz around your company before you even have a working product.

Cons: The average amount raised by crowdfunding campaigns in 2019 was $824. So if you need access to lots of money quickly, it might not be a viable option for your business. And only about 20% of all campaigns reach their fundraising target. If you don’t reach your goals—or find the money to grow your business elsewhere—you’re likely to have dissatisfied backers on your hands who can generate negative press about your business before you even go to market.

4. Shared resources from a community like a business incubator or accelerator

Joining or applying to join a business incubator or accelerator can help you access various tools you can use to grow your business. There are about 7,000 accelerators and incubators, each of which has its own industry focus and criteria for membership. 

Including providing funding, these types of communities can give you access to equipment, facilities, mentors, and advice that would be expensive or impossible to access yourself as a young business. Before we discuss the pros and cons of these types of communities, though, it’s important to know the difference between the two.

Accelerators

Accelerators often involve a competitive application process. Accepted startups typically receive seed money (in exchange for equity down the road) and are then expected to complete the accelerator’s program. These programs are exclusively aimed at developing your business, offer mentorship and classes, and typically last for several months. The program usually ends with a demo day, where you can pitch your startup to investors, who might provide you with more funding.

Incubators

Incubators typically focus more on resource sharing. These resources can be physical spaces or equipment, but they can also include access to lawyers, accountants, and other professionals equipped to give you business advice. Many incubators are sponsored by the government, nonprofits focused on economic development and research institutions like universities. 

Unlike accelerators, businesses can be part of an incubator for years. Instead of focusing on rapid development aimed at securing large amounts of funding from investors, incubators aim to help businesses access the tools they need for sustained growth and product development.

Pros: In addition to securing funding from these organizations, you can also save money on startup and development costs and access resources, such as industrial equipment, you can’t find elsewhere. You can also make valuable connections in your industry that could help you fundraise successfully in the future.

Cons: Joining these types of communities can involve fees and applications. And some request equity or royalties in the future in exchange for giving you access to resources upfront. It’s important to weigh these costs before you become an accelerator or incubator member.

5. Government grants

If you’re creating a new product or developing a new technology that could create benefits for the public, you might be eligible for a government grant. The government also provides grants to businesses owned by women, veterans, minorities, and those who aim to jumpstart economic growth in rural areas. 

Government grants can help cover the cost of research and development for businesses whose products could benefit the public.

Pros: You don’t have to pay back the money you receive from grants. As long as you meet the requirements, you typically retain full control over your business.

Cons: Grants are highly competitive and have long application processes. Before receiving a grant, you often have to pledge to match the funds offered by your grant. Of all the types of funding you can access, grant funding is probably the most difficult to obtain.

6. Credit cards

About 16% of entrepreneurs have used a credit card to fund their businesses. Millennial entrepreneurs are even more likely to use credit cards to grow startups, with 37% of them turning to this source of funding.

Pros: All you need is a decent credit score to open a credit card account. And unlike other types of debt, such as a business loan, you don’t have to specify or justify how you’re going to use your credit.

Cons: Credit card debt can come with high interest rates that can quickly become unaffordable. Plus, you only have access to the amount of money allowed by your credit limit, which is typically far less than the amount of money you’d receive from a loan. And like all forms of debt, it has to be paid back eventually. So while credit cards might be a good option for quick access to smaller amounts of cash, they’re probably not the best option for long-term funding for large projects.

7. Loans

If you’ve decided to take on debt, a loan can help you secure larger amounts of funding. Startups and small businesses have a couple of different options when it comes to loans.

Small Business Association (SBA) loans

SBA loans are specifically available to small businesses to help them grow or get started. SBA loans typically offer better terms than traditional business loans from banks. Businesses of all sizes can apply for loans ranging from $500 to $5 million. While larger loans are typically only available to businesses with credit history, new businesses can apply for microloans, capped at $50,000.

Bank loans

Traditional business loans typically have stricter repayment terms and are paid back at higher rates of interest than an SBA loan. Businesses who apply for loans have to have a demonstrated cash flow and excellent credit history so banks can ensure you’ll pay them back.

Pros: Debt financing gives you access to funding without having to give up any control over your business. 

Cons: Debt must be repaid eventually. If your business falls on hard times, you can still be subject to harsh loan terms. And if you’re unable to repay, you could tank your business credit or even have to declare bankruptcy.

8. Funds from angel investors

If your startup is developing something particularly innovative within your industry, you might be able to catch the eye of an angel investor. An angel investor is typically a wealthy individual who has been successful in his or her industry. They generally offer smaller amounts of funding than venture capitalists, with the average investment totaling about $25,000.

Pros: Since angels typically have experience in their industries, you can gain valuable insights and business mentorship. Plus, since larger amounts of cash are on the table then you might be able to access from your personal savings, crowdfunding, or family and friends.

Cons: Angel investments are generally offered in exchange for equity. At the very least, they might require royalties once you start making a profit. So accepting an angel investment generally means giving up some control, profits, or both, in return for funding.

9. Venture capital funding

Less than one percent of startups raise venture capital, which isn’t all that surprising when you think about the fact that most venture capitalists (VCs) want to bet on proven business ideas. In general, VCs tend to want to fund businesses that could go public or be valued at $100 million or more within five years. 

Pros: VC funding can give you access to the large sums of money—millions of dollars—necessary for rapid growth. Since VCs and their firms work with many companies, they can also offer useful business advice. And if you secure funding from the right VC, their reputation alone could give you access to funding from other sources, as well as raise the reputation of your business.

Cons: Like angel investments, the exchange for capital is often equity in your company. And since VCs are handing over such large sums, they often want more of a stake in your business. And since they expect you to use your funding to fuel rapid growth—and a large return on their investment—there could be more pressure to perform well in the market.

Get the bonus content: Startup Funding: A Quick Guide

Choose the right mix of funding for your startup

No matter how you choose to fund your startup, you should always include a healthy balance of different types of financing. Funding your business using various resources helps you better weather different financial changes and potential hardships. If one stream of funding doesn’t work out, you can look to another source to get you through a difficult time.

Financial monitoring tools can help you keep eyes on your various funding sources. Paired with a financial modeling tool, you can see how different funding streams align with your business plan and predict how they’ll impact your business over time. 

RaiseIQ can help you create financial models with both your startup’s health and investors’ questions in mind. And their continuous monitoring tools allow you to track how you’re doing financially as you raise funds, generate profit, or take on debt. Join the waitlist to get early access to RaiseIQ to monitor the financial health of your business—and keep it healthy as you grow.