How to Finance Your Startup

While frugality, bootstrapping, and living off ramen noodles can extend your runway — the amount of time you can keep the lights on at your business before running out of money — most startups will run into a cash crunch at some time or want to accelerate their growth.

Today we’ll explore some of the financing and growth options out there to fund your startup, as well as some questions you should think about along the way.

Why Do You Need Funding?

Whether you’re looking for seed money to get a business started or you want to expand your current operation, the first question to ask yourself is: What do you need the money for?

The second question is: Do you really need it? 

Can you get creative, cut costs, or increase sales instead of seeking funding?

I can’t count how many times I’ve talked to startups with no sales or sales strategy who say they’re entering a funding round. When I ask why, their reasons are often misguided and blurry.

This brings to mind the principle of Occam’s razor, which states that among competing hypotheses, the one with the fewest assumptions should be selected. In other words, the simplest solution is often the best solution.

You have a business to run, and it will not run successfully without your full attention. So stay focused on your business unless you have a clear strategy and purpose for the money you’re seeking.

Finding a viable funding source can be important for getting your startup off the ground or for taking it to the next level. However, it’s equally important to find a solution that allows you to maintain operations and focus on the profitability of your business.

If you can go out and make a few extra sales to generate the capital you need for your business, that may very well be your best bet, and you won’t need to devote your time to chasing other funding sources. That said, no two situations are the same. Whether you need $3,000 or $3 million, there are plenty of strategies you can use to fund your business. The trick is picking the one that works best for you.

Choosing the Best Funding Strategy for Your Business

What do you need the money for? How soon do you need it? What resources do you have access to? Who do you know has capital and believes in you and your business? Do you want money that comes with guidance and advising, or are you looking to go it alone?

Most small businesses piece together their funding from several different sources over time. No single source of funding is necessarily better than another. It depends on your business model, projections, your living expenses, access to resources, your runway, credit score, cost of capital, your willing to bootstrap, and how well you can sell yourself and your business to potential financial partners or investors.

Whether you are a startup seeking initial seed capital or you’re already operating a small business and looking for money to grow or invest in equipment, you have to be flexible, stay persistent in your efforts, keep accurate financial numbers, perfect your pitch, network continuously (when appropriate), and maintain a positive outlook.

Go Your Own Way

The simplest way to get the money you need for your business, with no strings attached, is to do it yourself. Let’s look at a few ways to pull this off.

Personal Savings

Do you have a savings account or rainy day fund? What are you saving for? A rainy day or slush fund may be the easiest, and often the quickest, way to fund your business.

Most entrepreneurs and small business owners these days have to self-fund their startup for a significant period of time until outside funding opportunities become realistic. If you believe in your vision and refuse to accept failure as an option, you should feel comfortable investing your own money into your business.

Since you have skin in the game, you will be frugal and smart with your money. And down the road, it could work to your favor by strengthening your story when you seek additional funding for your business from outside investors.

Also, no one believes in your business as much as you do — so if you are not willing to put your own money in to fund it, that in itself may be a red flag, unless of course you have access to other funding with a cheaper cost of capital.

If you have savings to tap, and retaining control of your company is important to you, investing your savings in the business may be the right place to start. But it’s not the only way to fund your business.

Credit Cards

Do you have credit cards? Have you ever considered them as an option to fund your business?  If not, credit cards are worth taking a closer look at as another way to fund your startup.

The pros of using credit cards are that you retain full control of your company, have immediate access to the money (if you already have the credit limits), and you don’t have anyone breathing down your neck — assuming you pay your credit card bills on time. The cons are that you have to pay high interest rates and the debt is yours whether the business makes it or not.

I have a friend who owns a sushi restaurant she started on her credit card; she has since paid off her credit cards and now has a thriving and profitable business to show for it.

While there are risks with funding your business on credit card, it may be worth exploring depending on how much money you need, how soon you need it, your credit score, and other considerations you and your business must assess.

Your credit score will impact your credit limit and interest rate, which will in turn determine your cost of capital (how much you have to pay the credit card company to use the money). Understanding the relationship between credit score, interest rates, and cost of capital is important to wrap your head around before using credit cards to fund your business.

Be aware that carrying a monthly balance could result in significant finance charges. Make sure the amount of money you plan to put on your credit card has a BEP (break even point) in your financial projections — estimate how long it will take you to pay off and what interest you will incur along the way.

Find More Customers

While thinking big and shooting for that billion dollar exit sounds cool, sometimes what your business needs is just another couple thousand bucks a month.

Often the best way to find the extra funding you need is to go out and make sales. Instead of investing your time looking for funding, invest that time looking for paying customers. Knock on doors, make cold calls, hustle a little bit more, and generate the extra revenue your business needs to grow or scale. If sales isn’t your thing, find a commission-only sales superstar to help generate more revenue for your business

I once consulted for a business transitioning from product rentals to product sales. They didn’t like selling, and I saw an opportunity to align interests and help their company get to the next level. We worked out an arrangement where I was compensated with a small retainer to address the unknowns in their sales process and was compensated with a hefty commission for each sale we made. We were able to generate a substantial amount of revenue ($100k+) in 45 days, resulting in a $50k+ cash infusion (profit remaining after expenses) into their business.

They were able to focus their efforts on running the business and product development, and they left the business development to someone who had a passion for it and was handsomely rewarded to focus solely on sales. Worth noting, I earned about $15,000 that month, and the lion’s share of my earnings were commissions. We made a short-term contract of 60 days and then had an agreement to reevaluate our terms.


If you have a large network of friends or fans, or an idea that people just find irresistible, Kickstarter and other crowdfunding platforms present another option for funding your business.

Crowdfunding allows you to promote your vision for your product online, and take orders and pre-sell inventory before you manufacture it.

Typically, you set a fundraising goal — say, $10,000 in 60 days — and anyone who likes your idea can pledge money to the project or pre-order merchandise. The money raised can exceed your goal — sometimes by a huge margin — but you only receive the funds if you meet your goal. You can also offer other premiums for larger contributions, from personalized, one-of-a-kind products to naming rights.

It can be a low-risk way to generate both exposure and potentially big investments. However, between planning and marketing, crowdfunding can take months to successfully raise money — and it takes just as long to fall flat of your goal.

We will get into crowdfunding in more detail in a subsequent post, but for now, just be aware that it’s another option.

Seeking Outside Funding

If your startup is seeking money from an outside source, you’ll likely need a good business plan, profitable projections, some of your own money in the game, or good connections to bankers and lender.

One startup company helping businesses connect with lenders is Bank My Biz. Bank My Biz allows you to ask questions to lenders, get professional advice, fill out a profile, and get matched with and contacted by lenders all in one place.

If you have revenue and can afford the monthly debt payment, seeking debt financing might be a good option for your business. Another reason to pursue debt financing is that you aren’t giving away a piece of your business.

The best fit depends on the price of the money, or something referred to in finance as cost of capital. When borrowing money, your cost of capital is essentially the interest rate.

Whether the price you pay to borrow money is 2% or 20%, it should always be lower than your expected return from using it. That is to say, don’t invest money in any project that won’t generate enough profit to more than cover the loan payments, including interest.

Friends and Family

Funding from friends and family is a very popular way to round up some initial funding for your business. Your mom, dad, siblings, and immediate network of friends are those most likely to understand your skills and work habits, and they may be investing more in you than your vision or your business.

While that’s wonderful and all, one very big downside is that you putting personal relationships at risk. Miscommunications, a poorly structured agreement, or a failed business can fracture friendships.

Make sure there is legal documentation for the consideration given to your business and a clear understanding of the agreement among everyone involved.

Small Business Administration

The U.S. Small Business Administration (SBA) is another great resource to look into for funding your startup. They offer a variety of loans and grants — from equipment and micro loans to specific programs for women- or minority-owned businesses — and offer many tools and online resources to help you explore your funding options.

The process of navigating the SBA — as with any government entity — can be a bit time-intensive, so we’ll dive deeper into it in our upcoming post on “Navigating the SBA.”

Incubators and Accelerators

If you have a startup team that values advice, guidance, and connections, and you’re all ready to put your heads down and work non-stop for the next three months, an incubator and accelerator might be right for you.

The top incubators and accelerators in the U.S. include YCombinator, 500startups, and Tech Stars. All of them are extremely competitive — you have to apply to join — but if your startup is accepted, the accelerator provides investment capital in exchange for an equity percentage in your company. Teams commit to work out of the incubator space for 90 days on average, with direct access to seasoned entrepreneurs, investors, and advisors.

Each accelerator and incubator varies in what they offer, but they are growing in popularity and there is likely one in your area.

To give you an idea of what an accelerator offers a company, in 2014, Y Combinator invested $120,000 in each company accepted in exchange for a 7% equity stake.

Angel Investors

Angel investors are wealthy individuals who provide capital for a startup. There’s a growing number of angel networks, groups of affluent individuals looking to invest in early stage companies. Unlikely venture capitalists, angels are investing their own money.

With angels, we’re now talking about venture funding — so they’ll be looking closely at your management team, ROI (how they get their money back), and your exit strategy.

When raising money from angels you have to keep in mind that they will own a piece of the business and you then have a fiduciary responsibility to act in the best interests of the business and its shareholders.

As Paul Graham of YCombinator says, “…trouble with investors is one of the biggest threats to a startup; managing them is one of the most important skills founders need to learn.” So keep that in mind before you run out and look for money in exchange for part of your business.

Regardless of which path you take now, you may explore more than one of these options at different points as your business grows. Finding the right funding for your startup is a business decision, but also a personal decision.

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