How to finance a business startup

What is a startup? 

Disruptive by nature, startups aim to change their industry with a new product or service that will become essential for customers.  

For example, the company has become so commonplace that “Uber” has virtually replaced the word “taxi,” but it was founded by two entrepreneurs looking for a cab on a snowy evening in 2009. 

The Uber service was tested in New York in early 2010 using only three cars; today, there are an estimated 3.5 million Uber drivers.  

This is just one story of a startup with an innovative idea delivering exponential growth. 

How to fund a startup 

When you have an idea for a startup that could change the world, you’ll want to give it everything you can to make it a success. 

Before you do anything, you should spend some time with a calculator, or basic accounting software, doing sums about how much money you might need to get started. 

Writing a detailed – and realistic – business plan is a good idea. Include the funds you need to start and how you imagine you will grow and scale your business over the first few years. 

Your business plan should also include when and how much you will turn a profit. This will be a crucial document if you try to convince investors to back your startup. 

Working out your business plan should help you choose what type of funding is best for you, but make sure you include the cost of any loan repayments into your plan. 

If you’re not yet sure what type of funding is best for you, here’s a closer look at some options. 

How startup funding works 

Whether you need cash to hire employees, buy inventory or rent a workspace, there are different ways to fund a startup.  

The most common ways to fund a startup are: 

Let’s take a closer look at what each of those entails: 

Self-funding 

This won’t be an option for everyone, but those with a healthy amount of cash in personal savings can choose to self-fund their startup. 

Using savings can provide you with the capital you need to get your startup off the ground. 

If you can afford to fund your startup, you also own the business, so you don’t have to split it with investors, and you can avoid paying interest on a loan.  

This can be a risky option, and when there are other economic pressures, self-funding a startup is a huge financial decision. You need to ensure you are not risking your financial future if you dip into your savings.  

Investors 

Many investors are looking for the next successful startup and are willing to put money behind bankable ideas – with the hope they’ll be rewarded in years to come. 

Angel investors and venture capital firms spend their time listening to startup pitches. They then choose to invest in those that offer the most promising returns on their investment. 

Many investors will want to own a percentage of the company in return for their money – think Shark Tank.   

Each investor is different, and while some will want to have a say in your business, others will leave you to handle things and will just be watching out for the return on their cash injection.  

Loans 

You can get a small business loan from a credit lender. 

Most banks want to see a record of finances before they agree to give you a loan, so startups may have to look elsewhere.  

If you take out a loan, you should remember that you’ll have to start paying it back – with interest – immediately.  

But some business loans are available to startups; let’s take a closer look. 

How do startup business loans work? 

Given traditional business loans from banks don’t always suit the needs of a startup, you may need to look at alternative loan providers. 

For bespoke advice about which loans might best suit your startup, it’s always best to speak to a financial advisor and get expert advice.  

Here is a selection of alternative providers: 

SBA microloan 

Did you know the U.S. Small Business Administration offers loans specifically to startups? 

Startups can access up to $50,000 to help get their business up and running. 

Unlike a bank, the SBA microloan is financed by non-profit community-based lenders and particularly aims to help lower-income businesses. 

Microloans 

Outside of the SBA, you can get microloans from other lenders. 

Generally, microloans aim to help businesses that can’t access other financial means. 

Although the amount you can borrow might be smaller than from other providers, favorable rates mean you could use a microloan to build your business.  

Once your business is more financially healthy, you can access more credit if needed. 

Personal business loans 

If your personal finances are good, you might be able to get a personal loan to help fund your startup. 

The loan amount can be smaller than a business loan, but if you have a good credit score, you can access a personal loan much faster than a business loan's lengthy approval process. 

Just be careful; some personal loans have conditions preventing you from using them for business. 

Online lenders 

You can access a range of business loan products online from alternative lenders. 

These lenders often process applications quickly and require less paperwork than others. However, the interest rates and fees can be relatively high. 

The bottom line 

As you can see, there are several ways to finance a startup. 

If you need help discussing your options and deciding which might be right, a financial advisor is your best bet. An expert advisor can listen to your needs and help you manage the early stages of your startup journey. Find your perfect financial advisor today.