Types of funding to launch your small business

Turning a business idea into a real running company—or growing the one you already have—usually takes some kind of funding. Business funding is the money a company receives to help run and grow its day-to-day operations. There are multiple ways to fund a business, and making the best choice depends on the stage your company is at and how much cash you need. 

Discover the different types of funding options available to decide which works best for your small business. 

What you’ll learn:

• There are plenty of business funding options available to help you build and grow your company.

• Some common business funding types include working with investors, taking out a business loan, crowdfunding and securing a business credit card.

• The best way to fund your business depends on a few key factors—like how much cash you need, whether you’re willing to give up an ownership stake, how quickly you want to grow and your long-term goals.

Self-funding—sometimes referred to as bootstrapping—is when you use your own money to kick-start and grow your business. This could mean tapping into your savings, taking out a personal line of credit or even reinvesting the revenue your company makes back into the business as a form of self-funding. 

Self-funding can be an attractive option because you don’t have to give up any ownership stake in your company and your business doesn’t have to take on any debt. You also remain in full control of your business decisions. But because you’re using your own resources, it can be a bit risky—if something happens to the business, your personal finances could take a hit.

A traditional business credit card works a lot like a personal credit card. You can use it to make purchases up to a certain credit limit and pay it off over time. One big plus is that business credit cards typically come with features and rewards designed for business owners. These include:

• Higher credit limits

• Employee cards

• Rewards you and your employees can earn on business spending

• Benefits like cellphone protection and access to airport lounges

• Tools such as itemized reports and transaction details, to help track expenses and manage cash flow.

There are also business cards that have no preset spending limit. Instead of a fixed line of credit, they offer a flexible credit limit that adjusts based on your spending habits. Both types of business credit cards can help you cover items like inventory, supplies or the costs associated with promoting your business. But with charge cards, keep in mind that the full balance is due each billing cycle. Failure to pay can result in interest charges, which can eat into your profits.

Bringing on an investor to fund your business is a type of fundraising that’s known as equity financing. This is a way to raise money by giving up a share of ownership in your company. There are a few types of investors you can team with, each with their own terms and expectations. Common types of investors include:

• Venture capital: Venture capitalists (VCs) are private equity investors who typically partner with startups with big growth potential. In return for their funding, they typically ask for equity in the company and may ask for a seat on the board. This can be a great option for businesses that might not qualify for other types of funding, especially if they’re still in the early stages. Since there’s more risk involved for the investor, VCs usually want a bigger piece of the company and might want some control over how things are run.

• Angel investor: An angel investor uses their own money to fund early-stage businesses in exchange for equity. Since these ventures can be risky, angel investors may also want a stake in the company and ask for a seat on the board. Compared to VCs, angel investors don’t have a large pool of funds to draw from since they’re not part of a firm. Typically, this means the amounts they invest tend to be smaller, and they usually focus on companies that are just getting started.

Investors in a small business can come in many forms. Friends, family members or even personal investors who aren’t tied to a firm can help fund your small business. When choosing an investor, consider what stage your business is at and how much equity you’re willing to give up. You might also want to go with an investor who offers networking, mentorship and other resources, rather than someone who takes a more hands-off approach.

Crowdfunding is a way to raise money from a group of people—called backers—to help small businesses launch and grow. There are different types of crowdfunding campaigns to choose from:

• Donation based: Some backers will provide funds to small businesses on a donation basis, expecting nothing in return. They might feel personally connected to the business or believe their donation is supporting a good cause.

• Rewards based: Businesses might offer a reward, like a product or other unique benefit in exchange for financial support. This is also a popular option for businesses looking to give backers an early version of their product as a reward.

• Equity based: This type of crowdfunding lets you raise money from a group of backers in exchange for a share of ownership in your company. Since it involves a larger group of people, you can usually raise more money, and those backers become partial owners of your business.

• Debt based: This is also called peer-to-peer, or P2P, lending, where you raise money from a group of backers who expect to be paid back over a set period of time, plus interest. Debt-based crowdfunding is similar to lender financing, but it can be faster and might offer lower interest rates. 

There are plenty of crowdfunding platforms out there, so it’s a good idea to review the terms and conditions so you understand the fees involved.

Another way to move your business forward is to take out a small business term loan. These loans can be short- or long-term, and you’ll receive the funds as a lump sum that can be paid back over time. Short-term loans are usually two years or less, whereas long-term loans can go up to 10 years. With term loans, you pay back the amount you borrowed, plus interest. In general, the longer the loan term, the more interest you’ll pay.

A business line of credit (LOC) lets you borrow money up to a set limit and use it as needed. Similar to business credit cards, business LOCs also let you borrow and pay back the funds repeatedly. However, one difference is that business LOCs have a set draw period, while business credit cards can be used as long as the account remains open. Plus, business LOCs don’t offer the rewards or other benefits that typically come with a business credit card.

Compared to other types of funding, business LOCs can also have high interest rates. On the plus side, once you’re approved, they can offer quick access to cash.

A Small Business Administration (SBA) loan is backed by the U.S. Small Business Administration but is provided by banks and other financial institutions. Because SBA loans are guaranteed by the government, they’re often easier to secure, with lower rates and longer repayment terms than other loans. But due to these factors, these loans are popular, and qualifying for an SBA loan can be tough. Additionally, it might take longer to access the funds.

Some companies might finance some or all of their operations with a business grant. Business grants are funds provided to companies by organizations like federal or state governments, charities or foundations, and they don’t need to be paid back. But business grants are usually for specific purposes or types of businesses. For example, there might be grants designed for women-owned businesses or research and development. 

Because they’re so specific and they don’t need to be paid back, it’s no surprise to learn that business grants can be hard to get. You can explore different types of grants by browsing government websites and databases or even look for charities and foundations in your industry.

As you look at different ways to fund your business, asking yourself these questions will help you find your best option:

• How much funding do I need? The first step is figuring out how much funding your business needs to thrive. Take a look at your business plan, your personal finances and your long-term vision for the company to get a sense of how much cash you’ll need. 

• Should I take on debt or give up equity? There are different ways to raise money for your company, and two of the most common ways are debt financing and equity financing. With debt financing, you typically don’t have to give up ownership, but the funds have to be paid back. Equity financing, on the other hand, involves raising money by offering investors a share of ownership—usually without a repayment requirement. Some business owners stick to one method, while others use a mix of both to get the funding they need. 

• How fast do I want to grow? Even though the idea of building your business is exciting, that doesn’t always mean it’s ready for rapid growth. Before you choose a financing strategy, consider how fast your company can–and should–grow. This will help you make the right decision for your business.

• What are my business goals? Think about your short-term business goals and how those fit into the long-term plans you have for your company. That vision can help shape your funding strategy. For example, do you plan to keep full ownership for the long haul? Or are you open to bringing in investors who might take on some decision-making power?

With business funding, there’s never a one-size-fits-all approach. Each company is unique, with its own needs and goals. If you’re looking for a flexible funding option that can support growth, you might consider a business credit card. Check out Capital One business credit cards, which offer tools and resources to help you get business done. And you can get pre-approved without it affecting your credit.