Pros:

• SBA loans are government-backed, meaning that qualification (in some regards) may be less strict than with traditional bank loans.

• Specialized programs are available for Veterans, Export-based businesses, commercial real estate, and more.

• Borrow up to $5 million.

Cons:

• Some businesses don’t qualify for the SBA loan.

• May have higher interest rates than bank loans.

• Loan approval process may be longer.

Learn More: Collateral Requirements for SBA Loans

Private Bank Loans for Startups

Bank loans are the most common small business options for medium to long-term financing, but most banks won’t lend to early stage startups without personal guarantees or collateral from the founders. Asset-based loans require clean balance sheet and sufficient assets that the bank will accept as collateral. The bank sets the loan term, the interest rate, and repayment schedule.

Pros:

• Low interest rates interest rates compared to convertible notes.

• Startup founders don’t need to give up any business ownership nor control over major business decisions.

• The bank can’t claim a percentage of the startup’s profits or shares.

• Fixed interest rates mean you can plan your repayments throughout the span of the loan.

Cons:

• The bank can restrict some startup operations.

• Collateral is generally required.

• Credit agreements will favor the bank.

• Assets can be seized by the bank if the startup founder defaults.

Funding with Seed Financing

Seed investments are received before an entrepreneur seeks further capital. They can be sourced from friends, family, angel investors, and nonprofit grants, and they usually occur as informal loans, convertible notes, convertible preferred stock, and simple agreements for future startup equity.

Startups will often complete several rounds of seed financing before they have enough funding to begin operations. The seed stage is the earliest and most critical funding round, when the monies received will cover early-stage expenses like market research or product development. Here’s more detail about the two main types of seed financing you can seek for your startup.

Friends and Family Seed Financing

For early stage startups, friends and family become important sources of seed financing. Investments from friends and family often take the form of informal loans or equity investments.

Pros:

• Benefitting from the trust and personal interest of close friends and family relationships.

• Vested interest in your startup’s success.

• Less aggressive terms and negotiations.

Cons:

• Support based on less sophistication and business knowledge than that from other business investors.

• Less understanding of true startup risks and potential struggles.

• More complicated decisions due to the personal element of friend and family involvement: simple business decisions are at risk of becoming intense personal matters.

Angel Investor Seed Financing

Startups can often benefit from angel investors, who are most often high net-worth individuals or informal venture capital types of groups who invest in both convertible notes and convertible equity. The capital they provide can be one-time seed money or it can be extended as ongoing support. Startup angel investors usually have a particular interest in the startup’s specific industry – or even in startups in general.

Pros:

• Angel investors generally have – and are willing to offer – more capital than friends and family.

• Angel investors don’t typically require a proven track record; they look for startups they believe can be successful, regardless.

• The structure of the funding can often be negotiated to a greater extent than can other, formal sources of capital.

• Angel investors can be helpful bridges between the amount of funding a startup has received through friends and family and the ability to look for venture capital.

• The experience, expertise, and connections of certain angel investors can provide valuable insight to the funded startup. Mentorship is invaluable.

Cons:

• Angel investing is considered a risk.

• Angel investors often expect high returns on their investments.

• Angel investors usually require clearly defined exit plans, such as initial public offerings or acquisitions.

• Angel investors usually expect to have significant representation on your board of advisors; they plan to play an active role in your business.

Funding with Venture Capital

Venture capital funding is available for startups considered to have the potential for significant long-term growth. Venture capital funding usually involves more risk for investors, but also has the capacity to provide much greater returns. After seed monies have been secured, startup companies may also choose to secure funding from venture capital firms, private equity firms, and large corporations with venture capital branches. Funding is raised through multiple steps.

Pros:

• A great source of funding if your startup company has proven its model and demonstrates a real potential for growth.

• Venture capitalists can give you access to significantly greater amounts of funding than any other alternatives for startups.

• Long-term funding, since venture capitalists usually look for long-term investment situations.

• There’s no obligation to repay venture capital funds before liquidation.

• Venture capitalists can also become valuable connectors, as they often have significant business experience and industry connections.

• You could be introduced to additional specific business leaders who are able and willing to help your startup grow.

Cons:

• Venture capital firms will usually require equity in exchange for their sizeable investment.

• Due to the extent of their contributions, venture capitalists will expect to be significantly involved in the operation and future growth of your startup.

• Venture capitalists will also want to secure significant representation on your advisory board.

• There will usually be an expectation higher rates of return on the venture capital investment.

• Venture capital firms will also frequently require further rights that can affect your startup’s structure and operational mobility.



Funding with Online Lending

Startup founders can apply for and obtain small business loans through online lending providers. While traditional bank loan applications can be lengthy and complicated, the online lending application process tends to be much simpler. Because of the simplicity, any funds are usually delivered to the startup founder much more quickly. Kiva is one well-known organization that participates in online lending. Kiva allows individuals to lend money to entrepreneurs.

Pros:

• Lenders can make funding decisions quickly – within hours of receiving the funding application.

• In addition to quick decision-making, online lenders also tend to make any approved funds available quickly.

Cons:

• Loans from these types of lenders can be more susceptible to fraud.

• There tends to be little assistance for startup founders in filling out the loan application.

• Any incorrect application submissions incorrectly can potentially lead to being charged higher rates.

Funding with Crowdfunding

Crowdfunding platforms and social media sites provide startup founders with access to investors and funding alternatives beyond the typical friends and family pool.

Crowdfunding allows entrepreneurs to source backers for startup funding by inviting numerous individuals to each invest a relatively small amount of money. The startup founders can then choose to give investors rewards, products, or services. They can even choose to give small equity shares in exchange for financial support. A few examples of popular crowdfunding campaign websites which allow entrepreneurs to set up campaigns to fund their business idea are:

• Indiegogo (the largest global fundraising site)

• Kickstarter (good for fundraising prior to raising venture capital)

• EquityEats (specifically geared towards restaurants)

• Tilt (cheaper fees and a supposed success rate of 91 percent)

• Fundable (exclusively for businesses)

• Patreon (geared towards artists and creators)

• Plum Alley (geared toward women)

• GoFundMe (another well-known funding site)

• RocketHub (steep fees if you don’t meet your goal)

One of the biggest differences between crowdfunding sites is whether they allow you to keep all the funds you raise, or whether they restrict you to all-or-nothing funding. All-or-nothing means that you must meet or surpass the initial funding goal you choose in order to access any of the funds. In contrast, sites which allow you to keep any funds you raise give you access any amount of money that you raise–you don’t have to meet your goal. The latter gives you more flexibility but can also leave you shorthanded if you need a specific amount of capital.

Before new rules were implemented, the SEC only allowed accredited investors to contribute funding to startups. Now, though, even those with an annual income or net worth under $100,000 are allowed to provide startup funding, with the maximum being five percent of one’s yearly income or net worth. This means startups can raise money more easily by drawing on a larger investor pool, even if they haven’t yet been able to attract the attention of higher net worth individuals.

Pros:

• Allows ideas to be tested in the public realm.

• Generates awareness and interest in startup business ideas.

• Offers a potentially fast way to raise funding.

• Low upfront fees to start a funding campaign.

• Easy progress tracking for investors, which may generate enthusiasm and investors to help you promote your startup through their own networks.

• An alternative option for startups not eligible for conventional funding.

• The ability to reach many investors via one platform.

• Online signup is relatively simple.

Cons:

• Potential theft of intellectual property if you haven’t protected your startup idea with a patent or copyright.

• If it’s an all-or-nothing model, any funding that’s been pledged gets returned to investors if you don’t meet your goal.

• Processing fees and charges for a percentage of total money raised.

• Marketing and compliance costs.

• Taxes.

• More difficult to implement for a more complex startup ides.

• Often best for funding needs under $100,000.

Funding with Bootstrapping

With bootstrapping, startup founders self-finance the company at the initial idea stage. They can contribute any assets of their own which the startup can use. They can also liquidate any non-cash assets and contribute them to the startup along with cash.

Pros:

• Keep all of the benefits of any earnings that accrue from your startup.

• Keep control over the startup’s ownership and operations.

Cons:

• Without large pools of capital to contribute to the startup, its ability to grow can be severely limited.

• Any founders’ capital could receive higher risk-adjusted returns by being invested elsewhere.

Funding with Credit Cards

Using credit cards seems obvious and simple, but it can mean that startup founders get easy access to funds on very short notice. Both personal credit cards and credit cards tailored specifically to small businesses are options for that kind of funding.

Pros:

• Easy approval for many small business credit cards.

• High credit lines.

• The potential for large amounts of capital.

• Small business credit cards often come with perks like mileage accrual and supply purchase discounts.

Cons:

• Dramatically high Interest rates compared to traditional bank loan interest rates.

• Directly affects your credit score if you make late payments or miss a few.

• Any blips in payments will hurt the founder’s future chances of getting funding from traditional banks.

Cheat Sheet: Different Types of Startup Funding

Funding Type	Best Benefits
SBA Loans and Microloans	Great for small businesses who don't need excessive funding. Also a good option for those with less-than-perfect credit.
Bank Loans	Low interest rates, keep control of your business, payment planning.
Family and Friends Seed Funding	Trust, vested interest, less aggressive terms.
Angel Investor Seed Funding	No proven track record required. Experience, expertise, and business connections.
Venture Capital	More, and longer-term, funding.
Online Lending	Quick approval decisions, quick access to funds.
Crowdfunding	Simplicity, speed, flexibility, reach.
Bootstrapping	Keep full control of your business, no debt required.
Credit Cards	Potential for high credit lines and large amounts of capital, accrue additional perks

Related Questions

What are the best small business loan options for entrepreneurs in 2018?

The best small business loan options for entrepreneurs in 2018 depend on the size of the loan and the creditworthiness of the borrower. For loan amounts of under $50,000, an SBA microloan may be the best option, as they don't have the strict credit requirements that characterize most SBA loans. For larger loan amounts, the SBA 7(a) loan may be the best option. Other options for entrepreneurs in 2018 include private bank loans, seed financing, friends and family seed financing, angel investor seed financing, venture capital, online lending, crowdfunding, bootstrapping, and credit cards. For more information on each of these options, please see the Entrepreneur’s Guide to Startup Business Loans in 2018.

What are the advantages and disadvantages of SBA loans for startups?

The SBA 7(a) loan can be an excellent option for startups looking to inject some cash into the ledger. These government-backed loans aim to help small businesses like yours, without sufficient external funding sources, get off the ground and running with enough capital to really succeed. Money shouldn’t be the thing that’s standing between your startup and success.

Advantages of SBA loans for startups include:

• Longer repayment terms than traditional loans
• Lower interest rates than traditional loans
• No collateral required
• No personal guarantee required
• No minimum credit score required

Disadvantages of SBA loans for startups include:

• Lengthy application process
• Strict eligibility requirements
• High closing costs
• Longer processing times

What are the most popular crowdfunding platforms for small business financing?

The most popular crowdfunding platforms for small business financing are Kickstarter, Indiegogo, Republic, CircleUp, Crowdfunder, Fundable, EquityEats, Tilt, Patreon, Plum Alley, GoFundMe, and RocketHub.
Sources: Non-SBA Financing Options for Small Businesses, The Entrepreneur’s Guide to Startup Business Loans in 2018: From SBA and Crowdfunding to VC and Beyond

What are the key differences between venture capital and traditional business loans?

Venture capital funding is available for startups considered to have the potential for significant long-term growth. Venture capital funding usually involves more risk for investors, but also has the capacity to provide much greater returns. After seed monies have been secured, startup companies may also choose to secure funding from venture capital firms, private equity firms, and large corporations with venture capital branches.

Bank loans are the most common small business options for medium to long-term financing, but most banks won’t lend to early stage startups without personal guarantees or collateral from the founders. Asset-based loans require clean balance sheet and sufficient assets that the bank will accept as collateral. The bank sets the loan term, the interest rate, and repayment schedule.

Key Differences:

Venture Capital	Traditional Business Loans
A great source of funding if your startup company has proven its model and demonstrates a real potential for growth.	Most banks won’t lend to early stage startups without personal guarantees or collateral from the founders.
Venture capitalists can give you access to significantly greater amounts of funding than any other alternatives for startups.	The bank sets the loan term, the interest rate, and repayment schedule.
Long-term funding, since venture capitalists usually look for long-term investment situations.	Asset-based loans require clean balance sheet and sufficient assets that the bank will accept as collateral.
Venture capitalists will usually require equity in exchange for their sizeable investment.	Collateral is generally required.
Venture capitalists will expect to be significantly involved in the operation and future growth of your startup.	Credit agreements will favor the bank.
Venture capitalists will also want to secure significant representation on your advisory board.	Assets can be seized by the bank if the startup founder defaults.
There will usually be an expectation higher rates of return on the venture capital investment.
Venture capitalists will also frequently require further rights that can affect your startup’s structure and operational mobility.

What are the most important factors to consider when applying for a startup loan?

When applying for a startup loan, the most important factors to consider are the four Cs: capital, credit, collateral, and conditions. Capital refers to your ability to repay by looking at your business and personal earnings, savings, and debt. Credit is the credit history of your business and/or you, personally. Collateral includes assets that can be used to secure the loan if it is a secured loan. And lastly, conditions refers to the purpose of the loan, time in business, and industry of the business.

In addition, the top four financial challenges for startups are sales and marketing, contingency planning, human resources, and scaling up. Sales and marketing are important for bringing in new leads, while contingency planning helps you ride out the worst storms. Human resources are critical for finding the right people to handle opportunities, and scaling up is necessary to maximize profits.

In this article:
1. Entrepreneurship continues to rise as more and more individuals set out to pursue a dream.
2. The State of Startups in 2018
3. What Predicts Startup Success?
4. Knowing Your Niche
5. Big-Picture Thinking
6. Community and Connection
7. Top Barriers to Funding
8. Taxes and Regulations as Barriers
9. Age as a Barrier
10. Credit Score as a Barrier
11. Types of Funding for Startups
12. SBA and Microloans Startup Funding
13. Private Bank Loans for Startups
14. Funding with Seed Financing
15. Friends and Family Seed Financing
16. Angel Investor Seed Financing
17. Funding with Venture Capital
18. Funding with Online Lending
19. Funding with Crowdfunding
20. Funding with Bootstrapping
21. Funding with Credit Cards
22. Cheat Sheet: Different Types of Startup Funding
23. Related Questions
24. Get Financing
Tags
• Startups
• Start-Ups
• Startup Funding
• Entrepreneurship