The Federal Reserve Banks released pre-pandemic data that showed that 85% of small business applicants who looked for funding in the previous year applied for a loan or line of credit. 1 But there are a ton of other funding options available to support the operation of your company and help it reach its full potential.
Business funding generally falls into one of two categories: Debt financing and equity financing. Debt financing is when your business borrows money by taking on debt, whereas equity financing is when you sell a piece of your business in exchange for cash. Read our guide to discover ten different sources of business capital and the locations where you can apply for each one if you’re looking to investigate your options for small business funding.
Starting a business is an exciting but daunting endeavor. To start your business, you’ll need a winning concept, a strong business plan, and—most importantly—money. Some business owners can fund their ventures with their own funds, but others must look outside for funding.
According to a 2018 survey by the Census Bureau, the most common sources of business startup capital fall into two main categories: equity and debt. Here are the five most common sources of capital for business startups:
1. Personal or Family Savings:
This is the most popular source of startup capital, with 83. 5% of businesses relying on it. The advantages are obvious: you can start your business with your current equity without taking on debt or paying interest. But the majority of Americans don’t have large savings, and minority communities are particularly affected by this.
2. Business Loan from a Bank or Financial Institution:
21.5% of businesses use this funding source. Qualifying for a business loan can be challenging especially for startups. Still many financial institutions offer loans with competitive interest rates, providing access to more significant capital than credit cards.
3. Personal or Family Assets Other Than Owners’ Savings:
This source falls into the equity category, with 11.2% of businesses using it. Leveraging personal assets like real estate or investments avoids debt but isn’t accessible to everyone.
4. Personal Credit Card(s):
11.1% of businesses use this funding source. While personal credit cards offer flexible payment structures and introductory APR periods, they have lower credit limits and high interest rates if you don’t pay your balance promptly.
5. Business Credit Card(s):
7.3% of businesses use this funding source. Business credit cards offer higher credit limits and longer introductory APR periods than personal cards. However, they come with high interest rates if you don’t pay your balance on time.
Additional Sources of Startup Capital:
- Venture Capital: This is a form of equity financing where investors provide funds in exchange for a stake in your company. Venture capital is typically reserved for high-growth businesses with significant potential.
- Angel Investors: These are individuals who invest their own money in startups, often in exchange for equity or convertible debt. Angel investors typically invest in early-stage companies with high growth potential.
- Crowdfunding: This involves raising small amounts of money from a large number of people, often through online platforms. Crowdfunding can be a good option for businesses that don’t qualify for traditional loans or venture capital.
- Government Grants: These are funds awarded by government agencies to support specific types of businesses or initiatives. Government grants can be a valuable source of capital, but they can be competitive to obtain.
Choosing the Right Funding Source:
The best source of funding for your business will depend on your specific needs and circumstances. Consider factors like the amount of capital you need, your creditworthiness, and the stage of your business. It’s also essential to research different funding options and compare terms before making a decision.
Remember:
- Personal savings are the most common source of startup capital.
- Business loans offer access to more significant capital but can be challenging to qualify for.
- Credit cards can be a flexible funding option but come with high interest rates.
- Explore alternative funding options like venture capital, angel investors, crowdfunding, and government grants.
- Choose the funding source that best fits your business needs and circumstances.
By understanding the different sources of startup capital and carefully evaluating your options, you can choose the best funding to launch your business successfully.
Business Credit Card
Like a business line of credit, a business credit card is another form of revolving credit. Extra benefits on business credit cards could include cash back, frequent flyer miles, free management services, and associated bonuses. But it’s crucial to use a business credit card sensibly and refrain from going overboard in order to take advantage of bonuses and other promotions. This is especially true if you won’t be able to pay off the entire amount in a reasonable amount of time. Interest accrues on overdue credit card balances, just like with other business financing options, so you might wind up spending extra money overall. Banks, credit unions, big credit card issuers, and other business creditors are some of the places where you can get business cards.
Purchase of Receivables
A purchase of receivables is not a loan, but an advance on future revenue. This kind of financing typically issues funds in fixed daily or weekly deposits, though term details vary by lender. The future income can usually come from a variety of sources, including checks, cash and credit card transactions. Purchase of receivables agreements are available from online lenders.
5. Sources of capital for business owners
FAQ
What are the sources of capital?
What are the 4 types of capital?
How do you identify capital sources?
What are the main sources of capital for a business?
1. What are the major sources of capital for any business? The three main sources of capital for a business are equity capital, debt capital, and retained earnings. Equity capital is where a company raises money by selling off a percentage of the business in the form of shares which are purchased and owned by shareholders.
What are the three major sources of corporate financing?
The three major sources of corporate financing are retained earnings, debt capital, and equity capital. Retained earnings refer to any net income remaining after a company pays off any expenses and obligations. Debt capital is funding that a company raises by borrowing money from lenders through loans or corporate bond offerings.
What are the different sources of funding?
The different sources of funding include: The main sources of funding are retained earnings, debt capital, and equity capital. Companies use retained earnings from business operations to expand or distribute dividends to their shareholders. Businesses raise funds by borrowing debt privately from a bank or by going public (issuing debt securities).
What are the different types of capital?
There are many different sources of capital – each with its own requirements and investment goals. They fall into two main categories: debt financing, which essentially means you borrow money and repay it with interest, and equity financing, where money is invested in your business in exchange for part ownership.