14 Solid Financing Options For Startups

Looking for financing options to fund your startup business isn’t just about the money.

You also want to retain control of your business, secure favorable funding terms, plan for the longterm … and overall just not get fleeced by unscrupulous investors.

In this guide, I’ve listed 14 financing options for startups to help you find the one best suited for your business and personality.

Self-financing: The Independent Route

Shutterstock was bootstrapped without external financing

Self-financing, commonly known as bootstrapping, involves funding your startup using your own money, be it from savings or other personal sources.

It’s the epitome of independence, giving founders full control without external influences.

Take Basecamp for instance. Founders Jason Fried and David Heinemeier Hansson didn’t court external investors. Instead, they funneled revenues from their existing businesses to build their venture. Today, Basecamp stands as a testament to successful bootstrapping.

Real World Success Stories

  1. MailChimp: Founded in 2001 by Ben Chestnut and Dan Kurzius, MailChimp started as a side project while the duo ran a design consulting business. Today, it’s one of the leading email marketing platforms globally.
  2. TechSmith: Founded in 1987 by William Hamilton, TechSmith is best known for screen capture software tools like Snagit and Camtasia. The company was funded using profits from its early software products.
  3. Shutterstock: Jon Oringer founded this stock photography company in 2003. He uploaded 30,000 of his own photos and grew the company without external financing.

Friends and Family Financing Options For Startups

Amazon started on a family investment


When starting a business, sometimes the first port of call isn’t an official bank or a high-stake investor. Instead, many entrepreneurs lean on their personal networks for initial seed money.

It’s an age-old route, rooted in trust and shared dreams.

And while it seems simple and informal, this approach isn’t without its nuances. Raising capital from those closest to you can be a double-edged sword.

On the one hand, friends and family are more likely to believe in your vision, even when the business plan is just scribbles on a napkin. They might offer better terms than professional investors or be more patient during lean times.

On the flip side, mixing personal relationships with business can be risky. If the venture goes south, holiday dinners might become a tad uncomfortable.

Real World Success Stories

Here are a couple of businesses that started with a helping hand from their inner circles:

  1. Amazon: While today it’s a global behemoth, Amazon’s initial venture was funded by Jeff Bezos’s parents, who invested a substantial $245,000 in their son’s dream.
  2. Under Armour: Kevin Plank, the founder, initially sold his athletic wear from the trunk of his car. To kick off production, he turned to close friends and family for an estimated $40,000.
  3. Squarespace: Before it became the website-building giant we know today, Anthony Casalena received a $30,000 loan from his father to start Squarespace.

Angel Investors: Guiding Wings for Budding Ventures

An angel investor is an individual with deep pockets and a desire to support the next big thing

Often touted as celebrities or trendy media figures, an angel investor is an individual with deep pockets and a desire to support the next big thing.

Typically angel investors are seasoned entrepreneurs or professionals who’ve amassed significant wealth and now wish to invest in promising startups. They offer more than just capital – they bring in their industry knowledge, network, and mentorship.

Unlike venture capitalists who typically represent institutional funds and have strict ROI goals, angel investors operate with a mix of business acumen and personal interest.

They’re in it for the thrill of nurturing something new, perhaps reminiscing about their own early days. Check out this list of the most prominent investors for inspiration and guidance.

Real World Success Stories

Several notable companies that are now household names received their initial boost from angel investors:

  1. WhatsApp: Before becoming a global messaging behemoth and being acquired by Facebook, WhatsApp received seed funding from former Yahoo employees who believed in the startup’s potential.
  2. Alibaba: The e-commerce giant from China saw early investments from Jerry Yang, co-founder of Yahoo.
  3. Uber: First Round Capital, an angel investing firm, was one of the early believers in this now-worldwide ride-hailing service.
  4. Costco: Before becoming the retail titan, Costco was supported by a group of angel investors who saw the potential in its wholesale model.

Venture Capital: Rocket Fuel for High-Growth Startups

Smash.vc is a venture capital firm that believes in a completely hands-off, CALM investing approach.

Venture Capital (VC) is often seen as the holy grail of startup financing, and for a good reason.

VC firms, with their vast pools of managed funds, have the ability to inject substantial capital into startups, propelling them from fledgling businesses to industry giants. But this injection comes with its own set of dynamics and expectations.

Venture capitalists aren’t just looking for an idea; they’re searching for the next big market disruptor.

Their primary goal? A hefty return on investment.

Typically, VCs aim for high growth potential businesses, often in tech or innovative sectors, with the intent of an eventual exit strategy such as an IPO or acquisition. For example, here is a list of investors specialized in SaaS startups.

While the allure of VC money is undeniable, it’s essential for startups to understand that such investments often come with strings attached. VCs might demand board seats, a say in business decisions, and a significant equity stake. Other VCs believe in a completely hands-off, CALM investing approach.

Real World Success Stories

Historically, the partnership between VCs and startups has given birth to some of the most iconic companies of our era:

  1. Google: Before it became the synonym for search, Google received funding from Sequoia Capital and Kleiner Perkins in 1999, two of the most renowned VC firms.
  2. Facebook: The social networking giant got its notable early VC investment from Accel Partners, which invested $12.7 million in 2005.
  3. Airbnb: Sequoia Capital, in its knack for spotting potential unicorns, invested in Airbnb’s initial days, helping the platform redefine travel accommodations.
  4. Snap Inc.: Lightspeed Venture Partners saw the potential in a young app called Snapchat and made an early investment, leading to its evolution into the multi-billion dollar company, Snap Inc.

Crowdfunding: Tapping into the Power of the Masses

Crowdfunding has emerged as a modern and accessible way for a startup business to raise capital.

Instead of relying on a single source of significant funding, crowdfunding lets businesses raise small amounts from a large number of people.

The process is straightforward. Entrepreneurs present their ideas on crowdfunding platforms, and interested individuals can pledge money to help bring these ideas to fruition.

The appeal of crowdfunding is its dual purpose: it validates the product or service with a real audience while securing the funds needed for development.

There are different types of crowdfunding:

1. Reward-based: Backers receive a product or service in return for their support. Platforms like Kickstarter and Indiegogo are prime examples.

2. Equity-based: Investors receive a stake in the company. Sites like StartEngine and Crowdfunder facilitate this.

3. Debt-based (or peer-to-peer lending): Money is loaned in return for interest, facilitated by platforms like LendingClub or Prosper.

While crowdfunding offers a more democratic way to raise funds, it’s not without challenges. Meeting backers’ expectations, managing production at scale, and navigating the regulatory landscape are all aspects to consider.

Real World Success Stories

1. Pebble: This smartwatch company raised over $10 million on Kickstarter, showcasing a massive demand for their product.

2. Oculus VR: Before its acquisition by Facebook, Oculus Rift turned to Kickstarter, raising $2.4 million and validating the market for virtual reality headsets.

3. Elio Motors: Utilizing equity crowdfunding, Elio raised significant funds on StartEngine, offering shares to backers and underscoring the potential of this new form of investment.

The Traditional Bank Loan: Classic Route to Funding

While the startup world often buzzes with tales of venture capital deals and crowdfunding campaigns, traditional banking options remain a cornerstone for many small businesses seeking financing.

Banks, with their established frameworks and rigorous processes, offer a sense of security and structure, especially for entrepreneurs who might not fit the high-risk, high-reward model of VC-backed startups.

Here are the primary banking options available for startups:

  1. The Business Loan: The most straightforward avenue, business loans are sums of money borrowed from a bank to be paid back with interest over a specified period. They’re best suited for businesses with a proven track record and solid credit history.
  2. Lines of Credit: Unlike lump-sum loans, a line of credit offers flexibility. Businesses can borrow up to a certain limit, pay interest on the amount drawn, and draw again as needed. A business credit card is useful for managing small business cash flows and unexpected expenses.
  3. SBA Loans: In the U.S., the Small Business Administration (SBA) partners with banks to offer loans to startups and small businesses. These small business loans come with the backing of the federal agency, making it easier for businesses to qualify. Should you need additional funding if the numbers don’t add up after getting an SBA loan, remember to contact SBA loan investors like Travis Jamison.
  4. Equipment Financing: For startups that require heavy machinery or other equipment, banks often provide loans specifically to purchase these assets. Here, the equipment itself acts as collateral, ensuring lower interest rates.

However, while traditional banking offers stability and structure, it comes with its challenges. The application process can be lengthy, and there’s a stringent requirement for collateral, credit history, and a detailed business plan.

That’s why many small business owners find it simpler to choose a less bureaucratic way of raising money.

Real World Success Stories

Given the longstanding history of traditional banking loans, there are numerous examples of businesses that benefited from them.

Many local small business owners, from your favorite corner cafe to the hardware store down the street, likely relied on small business loans to get off the ground.

Microloans: Small Sums, Big Impact

Kiva is a platform that facilitates microloans.

For many small business entrepreneurs, especially those in niche markets or underserved areas, large traditional loans might be out of reach.

That’s where the microloan comes in. It’s a financial tool designed to provide modest amounts of capital to startups and small businesses. It’s not just about the money but about fostering economic growth and empowering individuals.

Microloans typically range from as little as $50 to $50,000, which is less than typical small business loans. Their main appeal lies in their accessibility, especially for small business owners who might not have a credit history or collateral that traditional banks require.

Here’s a snapshot of the microloan landscape:

  1. Target Audience: Microloans are often directed at underserved demographics, including women, minorities, and entrepreneurs in developing countries or economically disadvantaged regions.
  2. Usage: Given their smaller size, microloans are generally used for inventory, machinery, working capital, or other immediate operational costs.
  3. Providers: While some traditional banks have microloan programs, many of these loans are administered by non-profit organizations or specialized microfinance institutions. Their goal goes beyond mere profit – it’s about empowerment and economic development.

While microloans offer accessibility and empowerment, they also come with higher interest rates compared to traditional loans, given the risk associated with lending to unestablished small businesses.

It’s essential to understand the terms fully and ensure the ability to repay.

Real World Success Stories

  1. Grameen Bank: Founded by Nobel laureate Muhammad Yunus in Bangladesh, Grameen Bank pioneered the concept of microloans, helping countless rural entrepreneurs kickstart their ventures.
  2. Kiva: A global platform that facilitates microloans, Kiva has connected online lenders with entrepreneurs worldwide. From small craft businesses in South America to agricultural projects in Africa, Kiva has played a part in numerous entrepreneurial stories.

Accelerators and Incubators: Nurturing Startup Growth

Y Combinator is a startup accelerator.

In the world of startup assistance, accelerators and incubators are of special importance.

These entities don’t just offer funding; they provide a comprehensive ecosystem to foster growth, mentorship, resources, and often, a space to work. While they’re sometimes used interchangeably, there are distinct differences between them.

Incubators: Think of incubators as a protective cocoon for early-stage startups. They offer a supportive environment, often for an indefinite period, allowing businesses to grow at their own pace. A well known startup incubator is Seed Rocket.

  • Features: Shared office space, mentoring, basic business services, and networking opportunities.
  • Funding Structure: Some take equity, while others might be sponsored by private or public entities and charge fees.

Accelerators: Accelerators, on the other hand, are like a pressure-cooker for growth. They take in startups with potential, offer intense mentoring and resources for a limited period (often 3-6 months), culminating in a “Demo Day” where startups pitch to a room full of investors. One well known startup accelerator is Y Combinator.

  • Features: Mentorship, office space, seed money, and educational resources.
  • Funding Structure: Most take equity in return for funding, mentorship, and resources.

Choosing to join an accelerator or incubator isn’t just about the funding; it’s about being part of an ecosystem.

Entrepreneurs get access to experienced mentors, potential partners, and a peer group facing similar challenges. The network, guidance, and reputation these programs offer can be invaluable.

Real World Success Stories

  1. Dropbox: The file-sharing giant went through the renowned Y Combinator accelerator program, which provided initial funding and mentorship.
  2. Reddit: Another Y Combinator alum, Reddit, leveraged the program’s resources and network to become the front page of the internet.
  3. Airware: The commercial drone company Airware (acquired by Delair) blossomed under the guidance of the Lemnos Labs incubator, gaining the resources and connections necessary for growth.

Grants: No-Strings-Attached Boosts for Startups

Grants are unique in the world of startup financing. Unlike a business loan or equity investments, they don’t need to be repaid nor do they dilute company ownership.

Essentially, they are financial gifts awarded to businesses that meet specific criteria, usually aligned with social, research, or economic objectives.

Here’s a breakdown of grants:

  1. Source: Grants are typically provided by government agencies, non-profit organizations, and sometimes private institutions or corporations.
  2. Criteria: They’re often awarded based on specific goals, such as fostering innovation in a particular sector, promoting social welfare, or advancing scientific research.
  3. Competitiveness: Due to their no-strings-attached nature, grants can be highly competitive. They require thorough applications, showcasing the business’s potential to meet the grant’s objectives.

When considering grants, startups should be mindful of:

  • Application Process: It can be time-consuming, requiring detailed business plans, research proposals, and clear alignment with the grant’s objectives.
  • Reporting: Once a grant is received, businesses might need to provide updates on their progress, ensuring the funds are used for the intended purpose.

Real World Examples

  1. Moderna: Before becoming a key player in the COVID-19 vaccine landscape, Moderna received research grants to pursue its mRNA technology.
  2. Tesla: The electric vehicle giant was awarded grants from the state of California to promote clean energy research and production.

Trade Equity or Services: A Barter-Based Approach to Startup Resources

In the early stages of a startup, cash can be scarce, but that doesn’t mean other valuable resources aren’t abundant.

Trading equity or services means a barter-based approach where startups exchange ownership stakes or their own services for essential services or resources they need to grow.

Here’s how this method pans out:

  1. Trade Equity for Services: Rather than paying cash, startups offer a percentage of company ownership in return for crucial services, be it legal advice, office space, or marketing expertise.
  2. Service-for-Service Barter: Instead of trading equity, startups exchange their own services for other services. For instance, a tech startup might develop a website for a marketing firm in return for a promotional campaign.
  3. Balancing Act: The trade-off here requires careful consideration. While it might save immediate cash, giving away equity means sharing a piece of the company’s future value.
  4. Clear Agreements: It’s essential to have clear contracts detailing the exact terms of the exchange to avoid future disputes or misunderstandings.

Real World Examples

  1. WeWork and Meetup: When WeWork acquired Meetup, part of the deal involved providing Meetup with office spaces in exchange for company equity.
  2. Startups and Law Firms: It’s not uncommon for early stage startups to offer equity to law firms in return for legal services, betting that their future success will compensate the firm generously.

Strategic Partnerships: Mutual Growth through Collaboration

Strategic partnerships are akin to powerful alliances. By forging collaborative relationships with other entities, startups can harness resources, expertise, and markets that might otherwise remain out of reach.

These partnerships are based on mutual benefit, with each party bringing something valuable to the table.

Nature: These partnerships can be formal or informal, long-term or project-based, but they always revolve around complementary strengths.

Benefits: Startups might gain access to new markets, technologies, capital, or expertise, while established companies can innovate faster, tap into fresh perspectives, or penetrate niche markets.

Risk Sharing: Collaborating allows partners to share the risks associated with new ventures, be it launching a new product or entering a new geographical market.

When considering a strategic partnership, startups should:

  • Ensure Alignment: Beyond immediate goals, it’s essential to ensure that values, company cultures, and long-term objectives align.
  • Draft Clear Terms: Clearly outline roles, responsibilities, profit sharing, IP rights, and exit strategies.
  • Maintain Open Communication: Regular check-ins and transparent communication can preempt potential misunderstandings or misalignments.

Real World Examples

  1. Spotify and Samsung: Spotify became Samsung’s go-to music provider, getting a direct line to millions of Samsung users, while Samsung enriched its user experience with a premium music service.
  2. NASA and SpaceX: While NASA has the expertise and history, SpaceX offers cutting-edge technology and cost efficiencies. Their partnership revitalizes space exploration, combining public sector objectives with private sector innovation.
  3. Google and Twitter: In a deal that integrated tweets into Google search results, Twitter expanded its reach, and Google made its real-time search results more dynamic.

Revenue-based Financing: Tying Funding to Future Sales

Revenue-based financing (RBF) offers a unique proposition to startups: receive funding now in exchange for a percentage of future revenue.

This model stands out in the financing landscape as it aligns the interests of both the investor and the business. Instead of focusing on equity or fixed repayments, RBF shifts attention to actual sales and cash flow.

Mechanism: Startups receive capital upfront. In return, they commit to paying back a percentage of their monthly revenues until a predetermined amount is repaid.

Flexibility: Payments fluctuate based on monthly revenues. In high-sales months, startups pay more, while in leaner months, they pay less.

No Equity Dilution: Unlike venture capital, RBF doesn’t require startups to give up ownership stakes. Instead, once the agreed-upon amount is repaid, the obligation ends.

Real World Examples

  1. SaaS Companies: Given their recurring revenue model, many Software as a Service (SaaS) startups find RBF an attractive option. Companies like Baremetrics and ChartMogul have popularized RBF in the tech space. Some of these SaaS investors offer RBF as well.
  2. Consumer Goods: Brands that have a consistent sales record but need capital for scaling production or marketing often turn to RBF. This has been seen across various sectors, from cosmetics to food and beverage.

Convertible Notes and SAFE: Flexible Instruments for Early-Stage Investment

Navigating the early stages of funding can be complex, particularly when valuating a startup.

Convertible notes and SAFEs (Simple Agreements for Future Equity) offer solutions to this dilemma, providing investment mechanisms that defer valuation to a later stage.

Here’s a breakdown of these financing methods:

  1. Convertible Notes: Essentially a short-term debt, this loan will convert into equity during a subsequent funding round, often at a discount for the investor.
    • Interest: These notes accrue interest, which can also convert into equity.
    • Discount: As a reward for early investment, convertible note holders typically get equity at a reduced price during the conversion.
    • Maturity Date: If the note doesn’t convert by this date, the startup might have to repay the loan or convert it into equity at a pre-determined valuation.
  2. SAFE: Introduced by Y Combinator, a SAFE provides rights to future equity, much like a convertible note, but with key differences.
    • No Debt: Unlike convertible notes, SAFEs aren’t debt instruments and don’t accrue interest.
    • No Maturity Date: There’s no obligation for conversion by a particular date, offering more flexibility to startups.
    • Simplicity: SAFEs tend to have more straightforward terms compared to convertible notes, which can simplify negotiations.

Real World Examples

  1. Many Y Combinator Startups: Given that Y Combinator introduced the concept, it’s no surprise that numerous startups from its batches have used SAFEs.
  2. Early-stage Tech Startups: Due to the benefits of deferring valuation, many budding tech ventures have leaned on convertible notes when securing their initial rounds of funding.

Factoring or Invoice Financing: Leveraging Accounts Receivable for Immediate Cash

For businesses with a gap between delivering services and receiving payment, factoring or invoice financing can be a lifeline.

This method involves selling invoices at a discount to a third party, turning outstanding invoices into immediate cash.

Here’s an overview of this financing strategy:

  1. Mechanism: Businesses sell their outstanding invoices to a factoring company (or factor) that provides an immediate payment, typically a large percentage of the invoice’s total value. Once the invoice is paid by the customer, the factor provides the remaining balance minus their fees.
  2. Benefits: It allows businesses to have immediate access to cash, alleviating cash flow strains and enabling them to meet operational costs without waiting for customer payments.
  3. Types:
    • Recourse Factoring: If the client doesn’t pay the invoice, the business is responsible for repaying the factor.
    • Non-recourse Factoring: The factor assumes the risk of non-payment.

Real World Examples

  1. Manufacturing Companies: Industries with long production cycles often use factoring to maintain consistent cash flow, especially when dealing with large retailers or distributors that have extended payment terms.
  2. Staffing Agencies: With a gap between paying staff and receiving client payments, these agencies often leverage invoice financing.
  3. B2B Service Providers: Companies providing services to other businesses, especially those with staggered payment terms, might use factoring to bridge cash flow gaps.

Your Turn

As you see, there’s a multitude of financing options for your startup funding. Remember that each option presents a unique opportunity, shaped by its risks and rewards.

If a business loan sounds too stressful, apply for a grant.

If giving up equity isn’t part of your plan, consider crowdfunding.

When you align your business funding strategy your startup’s mission and growth objectives, you pave the way for sustainable growth.


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