Most new businesses are funded through a combination of sources, not a single windfall. Your options range from personal savings and loans to outside investors and government-backed programs, and the right mix depends on how much you need, how quickly you need it, and what you’re willing to put on the line. Here’s a practical breakdown of each funding path, what it takes to qualify, and what it actually costs.
Self-Funding and Bootstrapping
The most common way people start a business is with their own money. According to Census Bureau survey data, the majority of new businesses launch with less than $25,000 in startup capital, and most of that comes from the founder’s personal savings, credit cards, or home equity.
Self-funding keeps things simple: you don’t owe anyone a share of your profits or a monthly loan payment. But it concentrates your risk. If the business fails, those savings are gone. If you’re using credit cards, you’re likely paying 20% or more in interest on balances you carry. A home equity line of credit offers lower rates but puts your house on the line if you can’t repay.
If you go this route, set a hard ceiling on how much personal money you’re willing to invest before you start. That number should be an amount you can lose without derailing your household finances.
SBA-Backed Loans
The Small Business Administration doesn’t lend money directly. Instead, it guarantees a portion of loans made by banks, credit unions, and online lenders, which makes those lenders more willing to approve borrowers who might not qualify on their own. The flagship program is the 7(a) loan, which can be used for working capital, equipment, real estate, or refinancing existing debt.
There’s no published minimum credit score for a 7(a) loan, but most lenders participating in the program look for scores in the mid-to-upper 600s at minimum. Eligibility depends on your credit history, what the business does, and where it operates. You’ll typically need to show a business plan, financial projections, and some personal investment in the venture. Most lenders also require a personal guarantee, meaning you’re on the hook if the business can’t repay.
Interest rates on 7(a) loans are capped at a base rate plus a spread that varies by loan size. For loans of $350,001 or more, the rate can’t exceed the base rate plus 3%. For smaller loans of $50,000 or less, the cap is the base rate plus 6.5%. These are maximum rates, so your actual rate could be lower depending on your credit profile and the lender.
The SBA also offers a microloan program that provides up to $50,000 through nonprofit intermediary lenders. These are designed for very small startups and tend to have more flexible qualification standards than traditional bank loans.
Microloans and Community Lenders
If you don’t qualify for a bank loan or an SBA-backed loan, Community Development Financial Institutions (CDFIs) are worth exploring. CDFIs are mission-driven lenders, including nonprofit loan funds, community banks, and credit unions, that serve economically disadvantaged communities and borrowers who lack access to traditional financing.
Loan amounts from CDFIs are typically smaller, often ranging from a few thousand dollars up to $50,000 or so, and the application process tends to be less intimidating than a bank’s. Many CDFIs also provide business coaching or technical assistance alongside their loans. You can search for CDFIs in your area through the CDFI Fund’s website at cdfifund.gov.
Grants: Limited but Real
Free money for starting a business sounds ideal, but the reality is narrower than most people expect. The SBA states plainly that it does not provide grants for starting and expanding a business. SBA grants go to nonprofits, educational organizations, and resource partners that support entrepreneurs through counseling and training, not directly to business owners.
The main exception is if your business involves scientific research and development. Two federal programs fund that work directly:
- Small Business Innovation Research (SBIR): Awards grants to small businesses conducting R&D that meets federal research objectives. Phase I awards are typically in the $50,000 to $275,000 range to prove feasibility.
- Small Business Technology Transfer (STTR): Similar to SBIR but requires formal collaboration with a research institution like a university.
Both programs are competitive and geared toward technology, biotech, defense, and similar industries. If you’re opening a restaurant or a consulting firm, these won’t apply.
Outside the federal government, private grants do exist. Corporations, foundations, and nonprofit organizations run grant competitions for specific groups of entrepreneurs, often targeting women, veterans, minority business owners, or specific industries. Award amounts vary widely, from $5,000 to $100,000 or more. These are worth searching for, but treat them as a bonus rather than a funding strategy. Competition is fierce, timelines are unpredictable, and most applicants don’t win.
Crowdfunding
Crowdfunding lets you raise money from a large number of people, usually through an online platform. There are two distinct types, and they work very differently.
Rewards-based crowdfunding, through platforms like Kickstarter or Indiegogo, lets you pre-sell a product or offer perks in exchange for contributions. You keep full ownership of your business. This works best when you have a tangible product that photographs well and generates excitement. The catch is that a successful campaign requires significant upfront effort in marketing, video production, and audience building. Platform fees typically run 5% to 8% of what you raise, plus payment processing fees.
Equity crowdfunding is regulated by the SEC under Regulation Crowdfunding (Reg CF) and lets you sell actual shares or ownership stakes in your company to everyday investors. You can raise up to $5 million in a 12-month period through a registered funding portal. This is real securities law, so you’ll need to file disclosures with the SEC and provide financial statements. For raises above $124,000, those financials need to be reviewed or audited by an independent accountant, which adds cost. Equity crowdfunding makes the most sense for businesses with strong growth potential and a compelling story that resonates with a broad audience.
Friends, Family, and Angel Investors
Borrowing from or selling equity to people you know is one of the oldest ways to fund a business. It’s fast, flexible, and doesn’t require a credit check. It can also destroy relationships if things go wrong.
If you take money from friends or family, put the terms in writing. Specify whether the money is a loan or an investment, what the repayment schedule or ownership stake looks like, and what happens if the business fails. A simple promissory note for a loan, or a written operating agreement for an equity stake, protects everyone involved.
Angel investors are wealthy individuals who invest their own money in early-stage companies in exchange for equity. Typical angel investments range from $25,000 to $500,000. Angels often invest in industries they know well and may offer mentorship alongside their capital. You can find them through local angel investor networks, startup pitch events, and online platforms that connect founders with accredited investors.
Rollovers as Business Startups (ROBS)
A ROBS arrangement lets you use funds from an existing retirement account, such as a 401(k) or IRA, to finance a new business without paying early withdrawal penalties or income tax on the distribution. The basic structure works like this: you create a new C corporation, establish a retirement plan under that corporation, roll your existing retirement funds into the new plan, and then use those funds to buy stock in your new corporation. The corporation then has cash to operate.
The IRS does not consider ROBS arrangements to be abusive tax avoidance, but it does flag them as “questionable” and actively audits them for compliance. The risks are real and significant. Your new retirement plan is a separate legal entity with its own filing requirements, including an annual Form 5500. If you fail to file, amend the plan in ways that discriminate against other employees, or run afoul of valuation rules, the plan can be disqualified. That triggers taxes and penalties on the full amount you rolled over.
The IRS has also noted that many people who used ROBS arrangements lost both their retirement savings and their business. Promoter fees for setting up these structures can run $5,000 or more, plus ongoing annual administration costs. If the business fails, you don’t just lose the company. You lose the retirement nest egg you spent years building. ROBS is legal, but it’s one of the highest-stakes ways to fund a startup.
How to Decide What’s Right for You
Start by figuring out how much money you actually need. Write out every startup cost you can identify: equipment, inventory, rent deposits, licenses, insurance, marketing, and enough working capital to cover several months of operating expenses before revenue kicks in. Many founders underestimate this number, so pad your estimate by 10% to 20%.
Once you have a number, match it to your options. If you need $10,000 to launch a service business, personal savings or a microloan may be all you need. If you need $200,000 for equipment and a lease, you’re likely looking at an SBA-backed loan, possibly combined with some personal investment to cover the down payment most lenders expect. If you’re building a tech product with high growth potential, equity crowdfunding or angel investors might fit.
Most founders layer multiple sources. A typical mix might be personal savings covering 20% to 30% of startup costs, a small loan covering the rest, and a credit card reserved for short-term cash flow gaps. Whatever combination you choose, make sure you understand the total cost of each dollar you borrow or give away in equity, and that you have a realistic plan for when the business will generate enough revenue to sustain itself.