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13 Funding Options for Startups in 2022

Startup Funding Options for 2021 & How to Apply; The initial stages of creating a startup can be exciting—being your own boss, working flexible hours, and building something from the ground up.
Kevin Brouillard
Kevin BrouillardUpdated October 27, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
The initial stages of creating a startup can be exciting — being your own boss, working flexible hours, and building something from the ground up. Finding the funding to transform an idea into a viable business venture, however, is a reality check for many entrepreneurs. With little business history or proven revenue, startups can find it challenging to come by funding. However, some planning, determination, and creativity can help you get the money you need to kick off your startup.This guide will explore how to fund a startup and explain how to go about getting the financing.

Considering Types of Startup Business Funding

There are two broad categories of startup financing available to businesses — debt financing and equity financing. Debt financing involves borrowing money to fund anything from working capital to equipment or inventory. The borrower is liable for repaying this debt and may be charged interest. Although collateral may be required for certain forms of debt financing, the borrower retains ownership of the business (as long as the debt is repaid). The other method for raising funds is equity financing. By selling equity to investors, startup businesses may be able to obtain the capital they need to launch or expand. Equity financing doesn’t involve the same debt repayment, though it does mean giving up some ownership of the company. That means that it may be helpful in establishing a positive cash flow for the business as quickly as possible. Emerging startups with large working capital needs might prefer forms of equity financing that let them grow quickly. When weighing both funding options, it’s important to consider how they match up with your  business plan, long-term goals, and existing finances. Every business is unique, and there are a variety of startup funding options to choose from to meet your business’s individual needs. Many ventures may end up combining multiple sources to achieve their funding goal. Before getting started, it can help to estimate your  total startup costs. That figure can  inform your funding strategies and goals. Remember, too, that it may take a while until your business starts turning a profit and establishes a positive cash flow, and build in a buffer to allow for that delay. Then, consider these seven options for startup business funding that can help you get up and running.Recommended: Tips for Starting a Small Business

1. SBA Loans

The Small Business Administration (SBA) is a federal agency that partners with lenders such as banks and micro-lending institutions to provide loans to startups and small businesses. Instead of directly lending to the businesses, the SBA guarantees a portion of the loan, which lets startup businesses access loans with more competitive rates and repayment terms. 

SBA Microloans

SBA microloans are available for funding options for startups. This program is administered through nonprofit lending organizations, which can provide up to $50,000 in startup microloan funding for working capital, supplies, furniture, equipment, and machinery. To receive SBA microloan financing, startup owners may have to participate in training and planning activities designed to help them launch their business ventures. Given that mentored startups raise seven times more money than their independent counterparts, this extra support might help accelerate the funding process.  

7(a) Loans

SBA 7(a) loans carry a minimum funding requirement of $350,000 and can be used for multiple purposes. 

504 Loans

By way of contrast, 504 loans are structured to finance fixed assets like real estate and come with longer repayment terms. 

2. Merchant Cash Advance

Instead of taking out a loan, you might want to consider a merchant cash advance (MCA), which can help startup businesses gain quick access to capital. For an MCA, you exchange a portion of your business’s future sales for a cash advance. Rather than charging interest as a percentage, MCAs utilize a factor rate — expressed as a decimal figure — to calculate repayment. For example, a $5,000 MCA with a factor rate of 1.3 will total $6,500 in payments made through future sales ($5,000 x 1.3 = $6,500). MCA repayment plans may use a fixed schedule or withdraw a percentage of your startup’s sales. Criteria for MCA approval can differ from those required for traditional debt financing methods. Generally, MCA companies place more weight on business performance than on an applicant’s credit score. This accessibility can come at a cost, though, so other options may make more financial sense unless funding is needed right away. Startup businesses with limited cash flow or those that have yet to launch may have trouble qualifying for an MCA since they have less evidence to demonstrate future sales. 

3. Equipment Financing

Depending on the nature of a startup, equipment may or may not be a major expense. Businesses in need of costly technology or machinery may be able to use equipment financing as a funding stream for their venture. Equipment financing has some advantages as a funding option for startups.For starters, equipment can usually act as collateral to help a business qualify and secure a lower interest rate for the loan. This is potentially useful for applicants who have faced obstacles to other financing due to limited assets and/or time in business.Equipment financing might require a down payment, but, typically, it lets startups hold onto more working capital than some other financing types. With more cash in hand, businesses can make key purchases and pursue other financing methods if needed. When assessing equipment financing options, it’s important to compare how the repayment term and the equipment’s useful life line up. Otherwise, startups run the risk of eventually having to  make payments on equipment that’s no longer being used. 

4. Business Line of Credit

For quick access to flexible working capital, a business line of credit could be a useful funding mechanism. A line of credit gives you access to an amount of funding with a maximum established by the lender. Once secured, the line of credit acts like a revolving fund that your  startup business can draw from for a variety of purposes, as long as the amount you take out stays below the credit limit. Besides this flexibility, a line of credit can help startups establish a credit history without accumulating significant debt. Unlike conventional loans, for a line of crest,  interest is only charged on the amount owed at any given time. Repaying the borrowed amount replenishes the line of credit so that it can be used again at a later date.  Lenders may require an applicant to have been in business for a minimum period of time to qualify for a line of credit. This could pose challenges for startup businesses that aren’t operational yet.

5. Grants

Free money to start a business might sound too good to be true, but a competitive selection of business grants offer just that. Grants are awards given by a government agency, foundation, nonprofit, or other entity. In most cases, they don't have to be repaid. Small business grants may come with guidelines about how the money must be used, though these terms typically have some flexibility. For federal grant opportunities, Grants.gov and Challenge.gov are good places to begin searching. Grants may be sector- or demographic-specific in their focus. Here are some examples:
  • Small Business Innovation Research (SBIR) Program: These grants  provide funding to encourage businesses to undertake research and development for the federal government.   
  • Amber Grant: This program awards one $10,000 grant to a women-owned small business every month.
  • Street Shares Foundation: This group awards three grants between $4,000 and $15,000 to startups or small businesses owned by veterans or their spouses. 
  • USDA: The agency offers multiple grant programs for rural startup businesses.
Since grants don't involve debt or transferring equity, they’re highly coveted by startup businesses. This fact, added to the fact that most grants are geared towards existing businesses, makes grants a more difficult funding source to obtain. Before diving into applications, it’s a good idea to consider carefully the tradeoff between time spent on grants and the likelihood of funding, especially during the busy startup phase. Recommended: 20 Small Business Startup Grants, Programs, and Checklists 2022

6. Crowdfunding

Rather than taking on debt or giving up equity, startups can launch a crowdfunding campaign to raise money. Crowdfunding initiatives can widely vary in structure and funding goals. To attract financial backers and raise awareness, a campaign might host a promotional event or offer complementary products in exchange for financial contributions. Some startups may choose to simply pitch their vision to garner support. While supportive family members and friends may be a logical audience to start with, utilizing online platforms can expand your startup’s reach. Keep in mind that platforms like KickStarter often take a percentage of the total funds raised or employ a competitive vetting process, like SeedInvest. It’s helpful to weigh how much time to spend on a crowdfunding campaign versus the expected reward. 

7. Angel Investors

An angel investor is a high-net-worth individual who seeks to increase his or her wealth through strategic investments in startups and business ventures. Depending on the nature of the relationship, an angel investor’s financial support may come as a one-time investment or as ongoing funding.Generally, funding and mentorship from an angel investor is given in exchange for ownership equity. This support can be critical during a startup’s early growth phase.     Entrepreneurs may find an angel investor among their own family, friends, or professional circle. Joining a business incubator or accelerator is another way to gain mentorship and meet potential benefactors.Preparing a thought-out business plan and coming in with a valuation for the ownership percentage could help you seal the deal. 

8. Invoice Financing or Factoring

The common thread of invoice factoring and financing is that both let you use your company’s invoices to secure a cash advance and free up cash flow.With invoice factoring, a lender buys your selected outstanding invoices and advances you the full invoice amount, minus a fee. That lender then is in charge of collecting the money. Instead of incurring new debt via bank loans or lines of credit, you are submitting your unpaid invoices for financing based on the strength of the customers’ credit.As for invoice financing, you are more in control of the clients’ invoices. You use those invoices as collateral in order to receive a lump sum of financing before they’re paid. Usually, you’ll receive between 80% and 90% of the invoice total face value upfront. Once the invoice is paid, you’ll receive the remaining balance. But first, the lender will take out its financing fee.Invoice financing is also known as accounts receivable financing because the borrowed funds are secured by future revenue.

9. Friends and Family Loans

When trying to figure out how  to fund a startup, many entrepreneurs turn to financing from their close relationships. But it’s important to get this right — or else you could end up with resentful, angry friends and family.It’s best to present your case with the aim of helping them understand why you need the money. Keep your pitch professional. Give them detailed information on how you’ll use the money, the time it will take you to repay them in full, and the amount that you’ll pay in interest.Very important: Have a written agreement ready that explains all the loan details before you approach your friend or relative. Before that person disburses the funds to you, you should both sign the agreement to seal the deal.

10. Personal Savings

Did you know that 75% of startup financing comes from personal savings? That’s what the SBA Office of Advocacy reports.The biggest advantage to self-funding is control. The fruits of your sales and investment come directly to you. And you won’t be tugged into a direction you don’t believe in because of an insistent investor.But of course self-financing is expensive. Some people find they make serious lifestyle changes to fuel their startup goal. If the small business owner has a “day job” as well, that job may suffer from divided priorities.Moreover, if you’re using your own money to cover production costs of a specific service or product, a large order can be too much to handle. And growth opportunities might be missed.

11. Venture Capital

Venture capital (VC) is a popular choice for startup financing options. It’s a way to secure the capital business owners need to grow, with the extra advantage of tapping experienced industry contacts for mentoring and advice. Venture capital for startups can be an exciting opportunity.Just remember that taking on venture capital should be a partnership between your startup and the firm, and since the relationship is one that may last for years, you need it to be a good fit.

12. Small Business Loans

Do banks want to see some revenue generated by a business before granting a loan? Some people say you’ll need six months of operation before you’re in a position to apply for a small business loan. Others say you’re likely to need at least a year in business. But there are always exceptions, and others say that if you have an excellent business plan, it’s possible to get a small business loan when you’re at the beginning of your journey.

13. Peer-to-Peer Lending

Peer-to-peer lending programs eliminate the bank as a middleman. This way it’s easier for borrowers and lenders to connect via online platforms. For many borrowers, this financing offers faster approval. For investors, it can be an opportunity to support businesses they are passionate about. 

Getting Funding for a Startup 

Around 400,000 small businesses are started every year in the United States—and 20% of them fail in their first year. Having a plan for startup financing options could make the difference by helping you survive year one and grow your startup into a successful business venture. The process of obtaining funding can vary enormously, depending on what type of funding you’re interested in and what the prospective source is. There are basic facts and documents you should be ready to provide:
  • How long you’ve been in business
  • Your projected annual revenue
  • Your personal credit score
  • Your business plan
  • What industry you’re in
Since many startups have less revenue and experience to demonstrate to lenders and investors, personal creditworthiness and finances can factor into the funding equation. An entrepreneur could choose to leverage his or her personal credit to qualify for financing. And having a solid business plan to show potential lenders that you have a good roadmap is also a practical idea. Alternatively, self-funding with savings and personal assets is an option for entrepreneurs who are hesitant to relinquish control of the startup. Putting equity into a business venture can also show investors and lenders alike that you’re willing to put some skin in the game. Startups typically have fewer financing options available than more established businesses. And although finding startup funding may not be an easy feat, it is doable. After calculating how much financing you need, it can be beneficial to think about how quickly you need it and when you’ll be able to pay it back. And remember, too, that you may want to obtain your funding from a variety of sources, not just one.

Lantern Business Loan Rates

There are a lot of startup financing options. Even if you’re ready to apply for startup business funding, it can be overwhelming knowing where to start. You can compare multiple small business loan options in one place using Lantern by SoFi’s comparison platform.Get one step closer to funding your startup with Lantern.

Frequently Asked Questions

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About the Author

Kevin Brouillard

Kevin Brouillard

Kevin Brouillard is a Returned Peace Corps Volunteer, educator, and personal finance writer. His work has appeared in online publications such as Earth Island Journal, Jetsetter, Oyster.com, and Tripsavvy. Kevin covers an array of financial topics for SoFi, including loans for students and small businesses.
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