Types of funding to launch your business

Businesses typically raise capital through three main funding methods: debt financing, equity financing and internal funding. Understanding these categories can help business owners choose the financing strategy that best aligns with their goals and growth plans.

Discover the different types of funding options available to turn your business idea into a real operating company—or grow the one you already have. 

There are generally a few types of business funding that can help you get your company started or help expand it: self-funding, debt financing, equity financing, crowdfunding and grants. Choosing the right type of funding for your business depends on your needs and financial goals.

Here’s a closer look at five different types of business funding available to start or grow a business.

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 reinvesting your company’s revenue to fund the business. 

Best for: Self-funding can be an attractive option for business owners 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.

With debt financing, you borrow money with the intention of repaying it over time with interest. Here’s a look at a few different options:

• Business credit cards: A traditional business credit card typically comes with features and rewards designed for business owners, such as higher credit limits and free employee cards, and additional benefits like access to airport lounges and account management tools. Some business cards even have no preset spending limit (NPSL). Rather than a fixed credit limit, spending capacity can adjust based on factors such as payment history and spending habits. Both types of business cards can help you cover expenses such as inventory, supplies and the costs associated with promoting your business. 

• Business term loans: Another way to move your business forward is to take out a business loan. These loans can be short or long term, and you’ll receive the funds as a lump sum to be repaid 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.

• Business lines of credit: A business line of credit (LOC) lets you borrow money up to a set limit and use it as needed. Like business credit cards, a business LOC allows you to borrow and repay funds repeatedly. However, business LOCs have a set draw period, and they don’t offer the rewards or other benefits that typically come with a business credit card. Compared with 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.

• SBA loans: 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 partially 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.

Best for: Debt financing is a good choice if you want to maintain ownership of your company but don’t have enough funds to get started or keep it running on your own. Just remember that regardless of how well the business is going, you’ll be required to make monthly payments.

Equity financing involves bringing on an investor to fund your business. 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 its 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 usually ask for equity in the company and 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 for the investor, VCs usually want a larger stake in the company and may seek 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 with 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.

• Individual investors: Friends, family members or even personal investors who aren’t tied to a firm can potentially help fund your business. 

When choosing an investor, consider your business’s stage 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.

Best for: Equity financing can be an option for business owners seeking access to funds without the obligation to repay. Just remember that you’ll be giving up some ownership in exchange for the funding.

Crowdfunding is a way to raise money from a group of people—called backers—to help businesses launch and grow. Crowdfunding can involve donations, rewards, equity or debt based on the type of campaign. Here’s a closer look at each:

• Donation-based: Some backers will provide funds to 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 (P2P) lending, where you raise money from a group of backers who expect to be repaid with interest over a set period. 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.

Best for: Crowdfunding can be appealing for new businesses hoping to connect with their customers without pursuing traditional funding methods. It allows you to market your products or services to backers who may already be interested in what you have to offer. And you can choose the crowdfunding platform that can best meet your business’s needs.

Some companies might finance some or all of their operations with a small business grant, which is funding provided by organizations like federal or state governments, charities or foundations. While they don’t need to be paid back, 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 repaid, 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.

Best for: Businesses that can qualify for a grant should always consider applying for one, whether you’re just starting out or need funds to expand. Just keep in mind that while they don’t need to be repaid, you’ll have to apply the funds the way the grantor has specified they’re to be used.

To decide which type of business funding makes sense for your company, it’s good to start by considering how much funding you need, how much debt you want to take on, how much of your business you want to share with investors, and what your short- and long-term goals are. Ask yourself these questions to 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? Two of the most common ways to raise money for your company are debt financing and equity financing. 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 they fit into the long-term plans 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?

Still curious about the different types of business funding for your business? Here are answers to common questions.

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 any impact on your personal credit score.