How to Fund a New Business: 10 Options Compared
Most new businesses are funded by a mix of sources, not one big check. Savings, a small loan, a few pre-orders and perhaps a grant can add up to enough to launch. This guide compares ten common ways to fund a new business, what each costs you in money, control and risk, and which kind of business each suits. It is general information, not financial or legal advice.
Key takeaways
- Every funding source has a price: interest, repayments, a share of ownership, personal risk or obligations to customers.
- Debt keeps ownership with you but must be repaid. Equity brings no repayments but gives away part of the business.
- Customer-funded options such as pre-sales and crowdfunding also test demand.
- Start by knowing your real funding need, then raise only what you need plus a buffer.
Before comparing options, you need a number. If you have not yet worked out your startup costs and runway, do that first. Raising too little leaves you short in month four. Raising too much on expensive terms can cost you for years.
Next, be clear about what you are willing to give up. Some founders are happy to share ownership for expertise and connections. Others would rather grow slowly and keep full control. Your answer will rule some options in and others out.
The three types of funding
Almost every option falls into one of three groups:
- Debt: you borrow money and repay it, usually with interest. Bank loans, microloans, credit cards and most family loans are debt.
- Equity: you sell part of your business in exchange for cash. Angel investors and some friends-and-family deals are equity.
- Non-dilutive and customer funding: money that is neither borrowed nor paid for with shares, such as grants, reward-based crowdfunding, pre-sales and your own savings.
Revenue-based financing sits somewhere between debt and equity: you repay from a share of future revenue rather than in fixed instalments.
10 funding options at a glance
The table below compares the ten options on the things that matter most to a new small business. Terms, availability and costs vary widely by lender, investor, platform and country, so treat this as a starting point.
| Option | Type | Do you repay? | Give up ownership? | Best for |
|---|---|---|---|---|
| Personal savings | Own money | No | No | Low-cost starts, any business |
| Friends and family | Loan, gift or equity | Depends on the deal | Sometimes | Early stage before lenders will help |
| Bank or SBA-backed loan | Debt | Yes, with interest | No | Businesses with a solid plan and collateral or credit history |
| Microloan | Debt | Yes, with interest | No | Small amounts, founders with limited credit history |
| Business credit card | Debt | Yes, often high interest if balances carry | No | Short-term, small purchases repaid quickly |
| Grants | Non-dilutive | Usually no | No | Businesses matching a specific program's criteria |
| Crowdfunding | Rewards, equity or debt | Depends on the model | Only with equity crowdfunding | Consumer products with a story |
| Angel investors | Equity | No | Yes | High-growth ideas needing capital and mentorship |
| Revenue-based financing | Hybrid | Yes, from a share of revenue | No | Businesses that already have steady revenue |
| Pre-sales | Customer funding | No, but you owe the product | No | Products and services you can deliver later |
Common mistake
Choosing funding by speed alone. The fastest money, such as a credit card or a quick online advance, is often the most expensive. Compare the total cost and the terms before you accept, not just how soon the cash arrives.
Funding from yourself and people you know
1. Personal savings
Bootstrapping with your own savings is the most common way to start a small business. You keep full control, pay no interest and answer to no one. The risk is personal: if the business fails, the money is gone. Set a clear limit on how much you will put in and keep an emergency fund for your household that the business cannot touch.
2. Friends and family
People who know you may help before any lender will. The money can be a gift, a loan or an investment in exchange for shares. The danger is to relationships. Put every arrangement in writing, state whether it is a loan or equity, agree on repayment terms or what happens if the business fails, and only accept money they can afford to lose.
Borrowing to fund your business
3. Bank loans and SBA-backed loans
Traditional term loans give you a lump sum repaid over a set period. In the US, the Small Business Administration backs loans made by approved lenders, which can make it easier for some small businesses to qualify. Lenders set the rates and terms. Expect to show a business plan, financial projections, personal credit history and sometimes collateral or a personal guarantee. New businesses with no trading history can find bank loans hard to get.
4. Microloans
Microloans are small loans, often offered by nonprofit and community lenders, sometimes with business support or training included. They suit founders who need a modest amount or who have a thin credit history. Amounts and terms vary by lender and program.
5. Business credit cards
Credit cards are convenient for small, short-term purchases and can help build business credit. Carrying a balance can become very expensive, and many cards require a personal guarantee. Use them for costs you can repay quickly, not to fund months of losses.
Pro tip
For any loan or credit product, ask for the total cost of borrowing in writing, including fees, and read the clauses on personal guarantees and early repayment. Two offers with similar headline rates can cost very different amounts.
Free and customer-backed money
6. Grants
Grants do not need to be repaid and do not cost you ownership, which makes them attractive. They are also competitive and usually tied to specific criteria, such as location, industry, research, or the founder's background. Applications take time, and some grants require matching funds or reporting. Treat grants as a welcome extra rather than the foundation of your plan.
7. Crowdfunding
Crowdfunding raises small amounts from many people through an online platform. There are three main models:
- Reward-based: backers receive a product or perk. You give up no ownership but must deliver what you promised.
- Equity crowdfunding: backers receive shares. It is regulated and involves disclosure requirements.
- Debt crowdfunding: backers lend money that you repay with interest.
Reward-based campaigns double as a test of demand. They take real work to run, platforms charge fees, and an unsuccessful campaign is public.
8. Pre-sales
Taking orders and payment before you deliver lets customers fund your first batch. It suits products with a clear launch date, courses, events and service packages. The money comes with obligations: be clear about delivery dates, have a refund policy and avoid spending pre-sale money on anything other than fulfilling those orders.
Example
Imagine a founder launching a line of handmade leather notebooks. She uses savings for tools and samples, then opens pre-orders to her email list and social followers with a delivery date eight weeks out. The pre-orders pay for the first batch of materials, and the number of orders tells her which colors to make more of. She only considers a small loan once she has repeat sales.
Investors and revenue-based funding
9. Angel investors
Angel investors are individuals who invest their own money in early-stage businesses in exchange for equity. Many bring experience and contacts as well as cash. Angels generally look for businesses that can grow large and offer a significant return, so they suit scalable ideas more than a lifestyle business or a local service. Expect due diligence, negotiation over valuation and terms, and ongoing reporting. A lawyer should review any investment agreement.
10. Revenue-based financing
With revenue-based financing, a provider gives you capital and you repay it as a fixed share of your future revenue until a set total is reached. Repayments shrink in slow months and grow in strong ones. Because it depends on existing revenue, it rarely suits a business that has not started selling. Compare the total repayment amount carefully with other options.
Debt: pros
- You keep full ownership and control
- The relationship ends once you repay
- Predictable repayments help planning
Debt: cons
- Repayments start whether or not sales arrive
- Often needs credit history, collateral or a guarantee
- Personal risk if you sign a guarantee
How to choose the right mix
- Know your number. Use your startup budget to set a funding target, including runway and a buffer.
- Start with the cheapest money. Savings, pre-sales and grants cost the least if they are available to you.
- Match the term to the use. Use short-term credit for short-term needs, and longer loans for equipment or fit-out.
- Decide on ownership. Only pursue equity if you want partners and your business can offer them a real return.
- Compare total costs. Put every offer side by side, including fees, guarantees and what happens if you fall behind.
- Get advice. Ask an accountant or adviser to review larger loans and any equity deal.
Your funding checklist
- Set your funding target from a realistic startup budget
- Decide how much personal money you can safely risk
- Decide whether you are willing to give up any ownership
- Check which grants and microloan programs you may qualify for
- Test pre-sales or a crowdfunding campaign if you sell a product
- Get written terms and total costs for every loan offer
- Put every family or friend arrangement in writing
- Have a professional review guarantees and investment agreements
Frequently asked questions
What is the easiest way to fund a new business?
For most founders, personal savings combined with early customer revenue is the simplest, because there is no application and no one to repay. Whether it is enough depends on your startup costs.
Can I get a business loan with no trading history?
It is harder but not always impossible. Lenders will lean on your personal credit, your plan, any collateral and sometimes a personal guarantee. Microloan programs and government-backed loans may be more open to new businesses than standard bank loans.
Should I give equity to friends and family?
Only if you are comfortable with them owning part of the business long term and you document the deal properly. A simple written loan is often less complicated for both sides.
Are grants really free money?
They usually do not need to be repaid, but they are competitive, come with conditions and take time to apply for. Read the rules carefully and budget for any reporting or matching funds.
Related reading
The bottom line
There is no single best way to fund a new business. Savings and pre-sales keep you in control, loans keep ownership but add repayments, and investors bring capital in exchange for a share of the business. Most founders combine two or three sources, starting with the cheapest and adding others as the business proves itself.
Terms, programs and regulations change and differ by country and state, so read every agreement carefully and talk to an accountant, lawyer or adviser before you sign.
