Financing Your Business

Financing a business isn’t easy. Whether you’re looking for startup funds or money to grow a business, there are many options and many steps.

But don’t be discouraged. The key is knowing your goals, getting organized and being well informed. Remember, there’s no such thing as financing that comes without strings attached.

We’ll look at types of financing, give you some ideas on assessing your fundability and finally, getting your finances in order to maximize your chances of securing financing.

Types of financing

One of the biggest decisions to make when raising money for a business is determining which type of financing is the right fit for you and your business long-term. Here, we walk you through three key types of financing: self-financing, loans (AKA debt), and investments (AKA equity). We also note alternative options for those who aren’t strong candidates for traditional avenues of financing.


Virtually every business is self-financed to some degree, since even securing a loan or investment typically requires small independent business owners to have financial “skin in the game.”

What are the various ways to self-finance a business?

Whether you’re fully financing your own business or putting up capital to secure additional investment, there are various ways to do it:

  • Tapping into existing personal savings accounts/cash

  • Taking out loans or lines of credit against real estate and investments—stocks, securities, etc.

  • Using credit cards to cover short cash-flow gaps and cover immediate business expenses

  • Factoring, or selling accounts receivables/invoices to a third party at a discount (usually 70%–90% of the value plus a fee) to meet immediate existing business’s cash needs

  • Making advance sales of your product prior to launch to get working capital

  • Bootstrapping, or running a business with dramatically reduced costs. This typically includes paying team members with equity rather than cash, keeping operational costs low and creating immediate revenue opportunities (i.e., selling advance subscriptions).

  • If your business is a C-corporation, you can also roll IRA or 401(k) funds into a corporate retirement account that allows you to invest that money into the business. running your business

  • When closing out the year to ensure that you have accurate records


Pros The upside of self-financing a business means you’ll run your business more efficiently and viably. It also means you’ll retain more control and can potentially attract high-quality lenders and investors down the line.

Cons Many businesses don’t make it and there’s always the risk of falling into debt or even bankruptcy. Before starting any business where you’ll invest time and money, be sure you have a solid plan and test it with customers.


Recent history

There’s no agreement on why this is the case. But whether it’s because of a lack of demand for loans or increasing stringency on loan requirements or other factors, small business loans from banks are down 20% since the crisis, and business owners report more difficulty accessing bank loans. These declines may be somewhat offset by new sources of financing, including new online lenders, but the process of getting access to small loans has become more challenging.

The recession of 2008 may seem like a long time ago. However there is evidence that it’s had a lingering impact on the availability of bank loans to small businesses. “The State of Small Business Lending,” Mills and McCarthy, Harvard Business School, July 22, 2014

What are the different types of business loans out there?

There are many different types of loans out there. Let’s review the various types, sources and what each entails.

Term loan: This is your basic garden-variety loan that’s paid off over a period of one to ten years. These loans can be used to purchase equipment, buy real estate or as a source of working capital. Most term loans are for amounts of $25,000 and greater. They tend to have fixed interest rates and are paid back on monthly or quarterly schedules with a set maturity date. Terms loans are either intermediate-term (3 years or less) or long-term (more than three years).

Short-term loan: As the name indicates, these are loans that are repaid in less than a year. They can be a good option if you need temporary working capital for one-time purchases or a temporary cash crunch.

Small Business Administration loan: To encourage small business growth, the federal government backs loans from a bank or commercial lender. SBA-guaranteed loans are made and serviced by the lender, but the government backs up to 80% of the loan principal, which greatly reduces the lender’s risk and helps provide financing that’s otherwise unavailable at reasonable terms. There are a variety of SBA loans out there; check out SBA’s tool if you are not sure which might be right for you.

  • 7(a) Guaranteed Loan Program: This is the SBA’s primary loan program. It’s generally used for new businesses or to meet short- and long-term needs of existing businesses, such as equipment purchases, working capital, inventory, or real estate purchase. These loans are generally guaranteed up to $750,000. The guaranteed rate is 80% on loans of $100,000 or less and 75% on loans more than $100,000. Learn more about the program or see the list of top 7(a) lenders.

  • 504 Loan Program: The 504 Loan Program provides long-term, fixed-rate financing to small businesses to acquire real estate, machinery or equipment. These loans are administered by non-profit Certified Development Companies (CDCs) through commercial lending institutions. 504 loans are typically financed 50% by the bank, 40% by the CDC and 10% by the business. Learn more

  • Microloan Program: SBA’s Microloan Program offers anywhere from a few hundred dollars to $35,000 for working capital or the purchase of inventory, supplies and/or equipment. The program serves businesses that can’t apply to traditional lenders because the amount they need is too small. Proceeds can’t be used to pay existing debts or purchase real estate. These loans aren’t guaranteed by the SBA but are delivered through non-profit intermediary lenders. Learn more

Equipment financing: This is a specific type of loan designed for existing businesses that are looking to grow through the purchase of equipment. It helps owners purchase new business equipment right away by using that equipment as collateral to back the loan. To qualify, business owners typically need to have a) almost a year of being in business under their belts, b) credit scores of at least 600 and c) over $100,000 in annual revenue.

Invoice financing (AKA factoring): A way for businesses to borrow money based on outstanding invoices from customers. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the amount of money due. Invoice financing can solve problems associated with customers taking a long time to pay and difficulties obtaining other types of business credit. Invoice financing also benefits lenders because unlike unsecured loans that leave little recourse if the business doesn’t repay, invoices act as collateral for this type of financing.

Microloans: Microloans are very small short-term loans ($500– $50,000) designed for businesses with little or no credit history, low-cost startups or sole proprietors or businesses with very few employees. Microloans can be used for many purposes, including working capital, inventory and equipment. They’re often used to help disadvantaged independents who would otherwise find it difficult to get business financing.

Merchant cash advances: A merchant cash advance is a lump sum of capital (up to $250,000) that you repay automatically using a portion of your daily credit card transactions. To qualify, you typically need to have been in business for at least five months and have over $75,000 in annual revenue. They’re typically provided through online finance companies and tend to be one of the most expensive and inflexible options on the market.

Friend and family loans: Borrowing money from friends and family may seem like a simpler route than approaching lenders, but it can be deceptively complicated. If you’re unable to repay the loan, your relationship is likely to suffer—and you as the business owner may not be held to the high standards that push you to bring in revenue as quickly as possible. Be realistic about how much money you need and be clear on whether you want a get a loan or sell an equity stake in the business. It’s always a good idea to lay out very specific terms, as you would if you were going through a bank, and put them in writing. This is usually done in the form of a signed promissory note but you can also use a P2P (peer to peer) lending platform like Lending Club.

What are different sources for securing loans?

Banks: Banks are traditionally the primary source of external financing for small businesses. However, as noted above, there has been a contraction in bank lending since 2008. When approaching a bank for a loan, keep in mind that about 72% of small independents who apply get rejected despite spending an average of 25 hours getting their paperwork together. That said, if you have good credit and collateral, bank loans offer low, fixed interest rates as well as a chance to build up your business credit.

Microlenders: Outside of the SBA’s Microloan Program, there are a variety of reputable nonprofit lenders offering loans of $50,000 or less to business owners who show promise but might not have access to traditional forms of financing. Microlenders tend to be local and have specific community requirements, such as participating in financial training, bringing in other community members as lenders or having a certain number of employees.

Online services: There are also a variety of online services geared towards helping borrowers find the right type of loan based on their needs and situation:

  • Fundera: With a single application, small business owners can apply to all of the industry’s top lenders and compare rates to find the right deal.

  • OnDeck: OnDeck offers loans from $5–$500K for businesses making $75K in annual revenue, at half the rate of traditional merchant cash advances.

  • helps businesses build, protect and leverage their credit to get loan-ready. It also offers resources for connecting directly with lenders.

  • SBA Link: The Small Business Administration’s tool that connects borrowers with SBA-backed lenders based on their business’s needs and parameters.

  • PayPal Working Capital: This is a flexible option where you pay back the loan with a fixed percentage of your daily PayPal sales.

  • Kabbage: This online lender issues lines of credit and loans under $100K for twelve months or less with a slightly lower barrier to entry of $50K in revenue.


If you’re just starting a business and you think it’s going to be a while before you’re able to turn a meaningful profit, then selling an equity stake in your business to an investor can be a great way to secure financing and get it off the ground. Keep in mind that loans are typically for established businesses with ongoing finance needs, which is why they require minimum annual revenue and a steady repayment schedule. Here are a few types of investors to consider:

Angel investors

These are people who invest their own money in an entrepreneurial venture, typically in the early stages when the business needs an injection of capital to get off the ground. Angel investors must meet Securities and Exchange Commission (SEC) standards for accredited investors, which means they have to have a minimum net worth of $1 million. In exchange for their investment, they typically receive a convertible note from the company, which is a loan that converts to preferred stock if certain thresholds are met. Most angels are seasoned business people who can also serve an advisory function for young businesses. Before signing on with an angel investor, consider these key things:

  • How much control does the investor expect?

  • How much control are you willing to share?

  • What is the investor’s motivation?

  • How experienced is the investor?

How do you find an angel investor?

These days it’s become much easier to find people who are active angel investors (although it hasn’t become easier to get them to invest!). In addition to your own local network, you can now connect with potential investors online. A few resources include Angel List, Gust, CircleUp, and the Angel Capital Association, which all help you connect with angels in your industry and region.

Venture capitalists

These are typically well-off investors, investment banks or firms that pool together investment capital. They tend to make early- stage, high-risk equity investments in startups that don’t have access to traditional capital markets but show long-term growth potential. In exchange, VCs take an ownership stake in the company and have a say in major business decisions. More often than not, VCs will also get one or two seats on the board of trustees. The pros include gaining the capital, prestige and expertise that comes with VC investment—the downside can be losing control of your company if you’re unable to keep up with growth expectations.

How do you get VC investment?

This is an often elusive form of investment, as even seasoned entrepreneurs sometimes struggle to raise VC funding. Getting the opportunity to pitch to a VC firm typically happens through extensive networking and word of mouth introductions. Of course, Rome wasn’t built in a day. To start your research on VC firms in your area and industry, check out the SBA’s Small Business Investment Company (SBIC) program and the National Venture Capital Association (NVCA).

If you are serious about pursuing venture capital, be sure to read Brad Feld and Jason Mendelson’s excellent "Venture Deals."

Alternative Funding Options

For business owners who are unable or unwilling to self-finance, or unable to find investment or qualify for loans, there are a variety of alternative funding options available:


This is acquiring small amounts of capital from large numbers of everyday investors to finance a new business venture. It uses online platforms such as social media and crowdfunding sites to connect entrepreneurs with investors from their own networks (friends and family) and beyond (interested individuals across the globe). While there are regulations and restrictions that apply to crowdfunding in the U.S., in general, entrepreneurs can raise hundreds to millions from anyone willing to invest.

How does crowdfunding work?

Hopeful entrepreneurs pitch their idea and their targeted fundraising goal, and online investors then pitch in based on their assessment of the value of a project. These investments can be rewards-based (e.g., investors get an early version of the product) or equity-based. Crowdfunding sites take a percentage of the funds raised. Keep in mind that entrepreneurs are notorious for overpromising on crowdfunding sites. Like with all investments, being able to deliver on your promise will affect your ability to fundraise for your current or future business ventures.

Top crowdfunding sites: Indiegogo, Kickstarter, GoFundMe

Government Grants

Federal, state and local governments offer a wide range of financing programs to help small businesses start and grow their operations. These programs include low-interest loans, venture capital and scientific and economic development grants.

How do government grants work?

Check out to get a list of government grants for which you may qualify. Note that most small businesses do not qualify for government grants and the process is not for the faint-hearted.

To learn more: Visit the SBA’s Facts About Government Grants page.

Business Incubators

Business incubators: These are organizations designed to accelerate the growth and success of entrepreneurial ventures by providing an array of resources and support to independents, including retail or office space, business coaching/mentoring, access to capital and networking connections. They’re typically sponsored by companies, universities and governments and accept entrepreneurs by application.

How do business incubators work?

Many incubators invite entrepreneurs to apply based on industry or location. The application process usually requires a detailed business plan, and potentially even an interview with a screening committee. The goal is to find businesses that are a good fit with their own mission and criteria, including industry, growth potential and regional impact. Some incubators operate as nonprofits while others take an equity stake in the businesses they support. Before signing on, be sure you’re comfortable with the terms.

How to find one: The National Business Incubation Association has a directory for finding business incubators by industry and region.

How fundable is your business?

What makes you and your business fundable?

Never forget that the goal of lenders and investors is to make money, and that small business loans and investments are a risky proposition. So before walking into a bank or meeting to ask for financing, save yourself valuable time and energy by being on top of the following information:

Credit: Lenders in particular look at credit history and high credit scores (typically close to the 700-range) to determine if a business owner has good history of paying off credit accounts, enough credit available to cover emergencies and no significant debts, delinquencies or bankruptcies. Bad or no credit tends to be a red flag for lenders. If you don’t have good credit history, learn more from the SBA about alternative loan options that might be a fit.

Cash flow/business plan: If you’re seeking out a loan, lenders want at least one year of data showing that your business consistently generates enough cash flow to cover the loan payments. If you’re fundraising from an investor and don’t have consistent cash flow yet, they’ll want to see a business plan that spells out when you expect to start generating revenue and what your plans are to get there.

Before meeting with banks or potential lenders you will need to put together a cash flow statement that describes your financial picture and solvency. For startups that don’t yet have revenues, you’ll need to generate financial projections and back them up with market data.

Capital: If you’re seeking out a loan to start a new business, most banks want to know that you have “skin in the game.” Generally this will mean that you contribute 20-30% of your own capital. You’re unlikely to get approved for a loan without being able to provide this contribution. If you don’t have capital, the next step is figuring out how to raise it by finding a business partner, tapping into retirement funds with a “rollover for business startup” (ROBS) or cashing out other investments. Note that you can’t use borrowed money (like a home equity line of credit) as an equity injection to secure a loan.

Like lenders, investors also like to see that a business owner has “skin in the game” before they open up their checkbooks. How much you invest personally depends on many factors.

Collateral: Collateral refers to the borrower’s business or personal assets (like a home, vehicle, inventory or accounts receivable) that lenders require to back a loan. In the event of a default, lenders will take the collateral to cover the cost of the loan. Keep in mind that if you have a business partner you may have different assets that leaves one of you more on the hook to provide collateral. Before signing on the dotted line, be sure to seek out legal advice. Our Buyers’ Guide to Legal Services has ideas on how.

Character: Banks and investors alike strongly consider something intangible that gets referred to as your “business character.” This refers partly to your willingness and ability to repay a loan (assessed in part by your credit history and score), but also to your bankability. Have you successfully started a business before? If not, how much experience do you have in the industry? And have you successfully driven revenue and profits for a business or employer before? Be prepared to answer these questions before any meeting with a lender or investor.

Conditions: Lenders and investors will also weigh several factors, some of which are out of your control and others within it. In particular, they’ll want to know how you plan to use the funds— whether it’s compliant with their bank’s or firm’s guidelines—and how that fits into the context of the current business and economic climate. Do your homework in advance to make a case for why your business is a good candidate.

Note that without all these elements—great credit history, a strong cash-flow statement or business plan, some “skin in the game” in the form of capital and collateral and a solid plan for how you will use the money to fuel growth—you aren’t likely to secure a major loan or investment. See our section on alternative funding options above.

Get your finances in order

Draw out your financial picture

Before you seek out funds for your business, the first step is figuring out what you already have. Begin by doing a thorough audit of your existing finances, assets and sources of revenue. You’ll want to round up the following information:

  • How much do you have in savings?

  • What is the value of your major assets, such as stocks, your home or other properties?

  • What’s the value of your retirement accounts?

  • How much money is your business pulling in annually? (It’s okay if the answer is zero.)

  • What are your current business expenses?

  • What income do you have from other sources (e.g., a spouse, a part-time job, interest income, etc.)?

  • Make a list of your credit cards and their credit limits.

  • Pull together tax records from the previous few years.

  • Finally, make a note of any outstanding debts.

The purpose of this exercise is to assess your financial standing and put you in a position to draft a business plan that pinpoints a) how much you’re prepared to invest in your business, and b) how much you need to seek out from third parties to take your business to the next level.

Separate your personal and business assets

As you establish your business, it’s important to clearly delineate between personal and business finances. This requires you to:

  • Open a business checking account and move all business transactions to that account. This may be at a community, regional or national bank or credit union.

  • Get a separate business credit card for business-related expenses.

  • Track business expenses separately from personal ones for tax purposes by using either a spreadsheet or preferably a financial accounting app. See our Buyers’ Guide to Accounting Software for reviews.

  • Determine your business’s tax structure—will it be a sole proprietorship, an LLC or a corporation? Learn more about the various business structures in our Business Structure Basics guide and for help finding an attorney to set it up, check out our Buyers’ Guide to Legal Services.

Plan your tax strategy

To deduct or not to deduct, that is the question. While meticulous recordkeeping of expenses can help your business claim these top deductions, there are two ways to consider deductions depending on the financing strategy you plan to take in the future:

If you plan on self-financing your business, then tax deductions are an effective way to lower your operating income, and therefore your tax burden.

However, if you plan on seeking out loans in the next few years— whether it’s to launch your business, purchase commercial real estate or expand/grow—then you may not want to be quite so aggressive with tax deductions that lower your operating income. This is because most lenders expect you to demonstrate that your business has sufficient profits to cover a loan’s monthly payments. See our guide Finance Basics for a review of financial management.

Consider opening a business credit card

There are various benefits to opening a business credit card. It’s a simple way to:

  • Separate personal and business expenses for accounting purposes

  • Establish credit for your business, which is helpful for securing loans and leases

  • Get cash rewards or points and a low-interest line of credit, depending on the card

However, you’ll also want to be careful with credit cards. The Kauffman Foundation did a study that found that for every $1,000 in credit card debt that a small business takes on, its chances of long-term survival fall by more than 2%!