Starting a small business takes more than just a great idea. You need capital to bring it to life. Entrepreneurs need to understand the sources of startup capital, which range from personal savings and loans to investors and grants, to make sound financial decisions, grow their businesses, and avoid overextending resources. Each funding source has its own benefits and challenges, and owners should carefully consider which type of funding fits their business models, goals, and risk tolerances, as well as their startups’ financial health and market readiness.

Below, we’ll explore the major funding options available, what investors look for, and how you can confidently approach capital management. Whether you’re just starting out or looking to scale, startup capital can lay a strong foundation for your business’s future.

What’s in this article?

• How to determine the exact amount of startup capital you need
  
• How to fund a small business
  
• What angel investors look for and how to approach them
  
• How to qualify for small business loans without a credit history
  
• Creative ways to raise startup capital without giving up equity
  
• Common mistakes when raising startup capital and how to avoid them
  

How to determine the exact amount of startup capital you need

One of the smartest steps you can take for your business is to determine exactly how much capital you’ll need early on. If you raise too little, you’ll be scrambling to cover basic expenses. But if you raise too much, you risk taking on unnecessary debt or losing control of your company. Here’s how to accurately calculate your capital needs so you can start strong and sustain momentum.

Define your business model and goals

Are you opening a storefront, launching a service-based business, or selling products online? Every type of business has its own startup costs, so knowing precisely what your business will offer—and how you’ll reach customers—is important. Think about the scope: are you planning to scale fast or will you start small and expand gradually? Define your goals for the first few years so your funding can match what you’re trying to achieve.

List your necessary startup expenses

Create a detailed list of everything you need to launch. Typical startup costs might include the following:

• Legal and licensing fees: Fees for business registration, permits, and other regulatory requirements vary widely by industry and location.

• Equipment and supplies: Consider the practical items you’ll need daily. These could include anything from laptops and software to manufacturing tools, furniture, and machinery.

• Inventory: If you’re selling products, account for the costs of stocking up and maintaining a good supply of inventory.

• Office space or rent: Calculate your costs for the space you’ll need, whether that’s for a commercial lease, coworking space, or home office.

• Technology: Account for everything from website development to the software subscriptions that keep your operations running.

• Marketing and branding: From logo design and website costs to social media ads, create a marketing budget to build brand awareness.

• Salaries: If you’re hiring from the start, estimate the costs of employing and retaining staff.

Try to determine these costs as precisely as possible, but don’t worry if there are some unknowns. This exercise is about getting as close to the real costs as possible.

Account for operational expenses

Beyond the up-front costs, operational expenses (or working capital) cover the basic costs of keeping your business going. These costs include rent, utilities, insurance, payroll, and other ongoing charges. Budget for at least three to six months of these expenses to create a cash cushion while your business stabilizes and, ideally, starts generating steady revenue.

Set aside a contingency fund

Prepare for the unexpected with a contingency fund. Generally, you should set aside 5%–10% of your total startup budget for surprises. Equipment might break, marketing experiments might not succeed, or you might need to adjust inventory or services based on early customer feedback. This contingency fund is your safety net for the unexpected.

Budget for personal financial needs

If your startup is your sole focus, you should also consider your personal expenses. Many entrepreneurs create a cash cushion for living expenses, enough to cover anywhere from six months to a year. If your business income doesn’t increase as quickly as planned, you’ll feel less pressure to draw a salary immediately.

Add the costs up and fine-tune them

Once you’ve estimated your costs, add them up, review them, and refine your budget. Are there areas where you can initially go leaner? For example, can you start with a smaller workspace or focus on the product with the highest potential? Work toward striking a balance that keeps you nimble while ensuring the necessities are covered.

Run projections for your first year

If you’re comfortable with projections, map out a basic financial model to anticipate your monthly expenses and income. This exercise will reveal your cash flow needs, show when you’re likely to break even, and prepare you for seasonal or unexpected revenue dips. These projections help improve your startup capital estimate and give you a solid foundation for making informed financial decisions.

How to fund a small business

Once you have a strong estimate of your capital needs, consider how you’ll actually fund your business. There are more funding options available than ever, from traditional loans and angel investors to creative alternatives. Here’s a look at some of the main paths you can take and how to choose the right option for your business.

Bootstrapping

Nearly 80% of small business startups are funded with personal savings or income from another job. Bootstrapping has its advantages: you maintain complete control, avoid debt, and don’t have to answer to investors. But it can be challenging, especially if your business has high up-front costs. This route is best if you can launch with a minimal budget or if you have a clear path to early profitability.

Loans or investments from friends and family

Friends and family are another common source for startup capital. These people know you and might be more willing to invest in your vision. But there are a few things to keep in mind here. First, treat these arrangements professionally. Draw up agreements to prevent misunderstandings later and decide before the investment whether this is a loan or an equity investment. Financing from friends and family can be flexible, but you have to set expectations around repayment or returns, especially since personal relationships are at stake.

Angel investors

Angel investors are typically high-net-worth individuals interested in funding startups, usually in exchange for equity. Along with capital, they also often offer expertise, industry connections, and mentorship. But be prepared for a thorough vetting process. Angels want to see a well-thought-out business plan, a strong team, and the potential for substantial returns.

Venture capital (VC)

VC isn’t for every startup, but it can be a powerful option for high-growth, flexible businesses, especially in tech, biotech, and other quickly developing industries. VCs typically look for startups with big market potential and a clear path to scale. The trade-off is that you give up equity and some level of control, as VCs will likely want a say in your company’s direction. VC can bring in substantial funding, but with it comes pressure to meet aggressive growth targets.

Small business loans

Small business loans are a more traditional route for those who prefer taking on debt over giving up equity. You’ll find loan offerings through banks, credit unions, and online lenders. Small business loans generally require a solid credit history and some form of collateral, which can make them difficult to secure for businesses that are just starting out.

Partnerships

Partnering with established businesses can also help fund your startup through shared resources, comarketing efforts, or direct investment. Partnerships might not always be cash infusions, but they can provide valuable support that reduces your capital needs.

What angel investors look for and how to approach them

Angel investors can be a great source for capital and mentorship, which makes them sought after by startup founders. Here are some tips to make your pitch stand out and improve your chances of working with this kind of investor.

Research investors and find the right fit

Not all angels are the same, so spend time identifying investors with track records in your industry and an interest in startups like yours. Platforms such as AngelList and Crunchbase and local investor networks can help you identify potential investors with relevant expertise. When you contact an angel, reference their past investments and highlight how your company fits that niche. This shows you respect the angel’s time and helps establish your credibility.

Lead with a hook and tangible metrics

Countless pitches come across angels’ desks, so it’s important to hook them fast with a brief, compelling statement about what makes your business special. Right after that, dive into metrics that showcase early traction. Specific wins—such as partnerships, user growth, monthly active users, and an excellent customer acquisition cost—signal that you can execute. Even if these milestones are small, they’re evidence of momentum and help investors see your potential.

Have a smart ask and transparent budget

Investors want to know exactly how much money you need, why you need it, and what it will achieve. Outline your funding request and break down how the capital will be allocated (e.g., 40% on product development, 35% on marketing, 25% on necessary hires). Tie these categories directly to efficiency to show you’re not just chasing capital, but have a vision for how to use it.

Address risks with realistic mitigation plans

Angels know that every investment has risks, but they’re looking for founders who are proactive about managing them. Be honest about potential challenges and share your tactics for mitigating them. For instance, if scaling production is a challenge, you might explain how you’ve secured a reliable supply chain partner. Anticipating and addressing risks shows you’re serious and planning ahead, which reassures investors that you can address uncertainty.

Outline a realistic exit strategy and keep networking

Finally, remember that angels are investing with the expectation of a return, so outline your plausible exit strategy. Whether it’s an acquisition, an initial public offering, or a buyout option, demonstrating a path to liquidity conveys to investors that you’re building with long-term value in mind. If possible, draw comparisons with similar exits in your industry to make this feel more concrete. And remember, networking goes a long way: meeting angels through mutual connections or industry events can help keep you top of mind as you move forward with your pitch.

How to qualify for small business loans without a credit history

Securing a small business loan without a strong credit history can be challenging, but it’s not impossible. A well-thought-out business plan can help sway lenders, so create a detailed plan that includes market analysis, your competitive edge, and realistic cash flow projections for at least the first year. Be prepared to demonstrate how you’ll generate revenue and repay the loan. If you’ve started generating revenue, even if it’s modest, use those numbers and growth trends as proof of your business’s outlook.

Providing collateral—such as equipment, inventory, and real estate—or bringing in a cosigner with a strong credit history can also improve your chances of securing a loan. The cosigner agrees to cover the debt if you can’t. Lenders view cosigning and collateral as ways to lower their risk.

With these measures in mind, here are some places to find small business loans if you don’t yet have an established credit history.

Alternative lenders and microloans

Traditional banks might be deterred by applicants with limited credit, but alternative lenders, online platforms, and microloan organizations are often more flexible. Platforms such as Kiva and Accion offer microloans or small loans specifically for startups. These loans are often based on your business plan, experience, and revenue potential instead of your credit history. While they’re usually smaller than traditional loans, they can be ideal for covering early-stage costs.

Small Business Administration (SBA)

The SBA is a valuable resource for new business owners in the United States who have limited credit. SBA-backed loans, such as the 7(a) program and microloans, are structured to reduce the risk for lenders and make them more willing to lend to new businesses. To make yourself a more attractive candidate, create a detailed business plan and be prepared to demonstrate how the loan will drive growth. SBA loans require some documentation and might take time to process, but the lower credit requirements and favorable terms can make them well worth the effort.

Community banks

Community banks and credit unions often have a more personal method of lending and tend to value relationships and local economic impact more than credit scores. Meet with a loan officer, discuss your business plan in detail, and be prepared to show evidence of market research and early revenue (if applicable). Building a relationship with a community bank can also open doors to future loans, even if your first loan is small.

Creative ways to raise startup capital without giving up equity

You’ll need to think creatively if you want to raise money without giving up equity in your startup. The options below can help you build capital while letting you stay true to your long-term vision and retain full control.

Crowdfunding

Crowdfunding on platforms such as Kickstarter and Indiegogo allows you to raise capital by preselling your product or offering rewards to early backers. This method lets you gauge demand, build a customer base, and generate revenue before launch. You can raise substantial funds with a compelling pitch by getting people excited about what you’re building. Crowdfunding works best if you have a tangible product, but you can also get creative with rewards-based campaigns for services or digital goods. You’ll need to create a realistic timeline and plan for fulfilling rewards to maintain customer trust.

Revenue-based financing

Revenue-based financing (RBF) empowers you to raise capital by borrowing against future revenue. With RBF, you agree to pay back a percentage of your monthly revenue until the loan is paid off rather than make fixed monthly payments. This flexibility enables you to grow without pressure during slower months, since your payments adjust with your revenue. RBF is popular among subscription-based or high-margin businesses and is ideal for businesses with some traction. Many RBF lenders also prioritize cash flow over credit history, which can make it more accessible to newer businesses.

Invoice or equipment financing

For businesses with substantial accounts receivable, invoice financing allows you to borrow against unpaid invoices. This can be helpful if cash flow is tight but you have pending client payments. If a lot of your startup costs are for equipment, consider financing directly through an equipment lender. This lets you spread out payments over time rather than pay for everything up front.

Grants and competitions

Non-dilutive grants and business competitions are excellent options for raising capital while maintaining your equity. Many government agencies, nonprofits, and private companies offer grants focused on specific industries, social impact, or improvement. Search for grants available in your industry and apply for any that are relevant for your business. Similarly, business competitions provide prize money, mentorship and networking opportunities, and media exposure. While they’re competitive, winning even a small grant or competition can provide both funding and validation for your business.

Customer or supplier financing

Suppliers might have financing programs or extended payment terms that allow you to defer payments until you start generating revenue. This can reduce the up-front capital needed for inventory or materials and let you launch faster. If you have strong customer relationships, you can also consider customer financing: offering discounts for up-front payments or long-term contracts can provide cash flow to fund growth. Service businesses might offer discounts for prepayments, while product-based companies could consider a subscription model to create recurring revenue.

Monetizing existing assets

You can also raise capital by monetizing existing assets. For example, if you have unused office space, consider subleasing it until you expand. You could also rent out specialized equipment or launch a basic version of your product first.

Common mistakes when raising startup capital and how to avoid them

Whether it’s falling short of investors’ goals, losing control of governance, or not building enough prelaunch buzz, many startups make mistakes early on. Here’s a closer look at some of these common issues and how to avoid them.

Misaligning funding with milestones

Raising capital without a precise match between funding and milestones is a major misstep. Investors want to see that you’re raising enough to hit specific growth points and that your goals are strategically aligned with the timing of your next funding round. If you raise too little funding, you risk running out of cash before you hit the metrics needed to justify a higher valuation in the next round. If you raise too much without reaching critical milestones, you might struggle to sustain that valuation in the eyes of follow-on investors.

Structure your fundraising around concrete goals. For example, you might want to secure six months of funding beyond the anticipated time to hit your next big milestone. This ensures you don’t return to the fundraising cycle prematurely and helps maintain your bargaining power with investors.

Failing to vet investor expectations and intentions

Too often, founders rush into partnerships without thoroughly vetting investors’ goals and intentions. Are they looking for a quick exit or long-term growth? Are they important investors or will they become passive board members? Mismatched expectations can lead to frustration or larger issues in the future. For example, an investor who pushes for aggressive growth might conflict with a founder focused on scaling sustainably.

To avoid this disconnect, ask specific questions during the negotiation process, including, “What does success look like to you in five years?” or, “How do you typically engage with portfolio companies?”

Underestimating the true cost of capital

The real cost of capital involves control and flexibility alongside valuation. Convertible notes, simple agreements for future equity (SAFEs), liquidation preferences, and board seats all have implications that can affect your decision-making and exit options. For instance, aggressive liquidation preferences can leave founders with a fraction of the returns even in a successful exit.

Read the terms and assess how they’ll impact future financing and your final payout. Work with a lawyer who’s well-versed in startup financing, and don’t be afraid to negotiate these terms. It’s much easier to set these expectations up front than it is to try and unwind unfavorable terms later.

Neglecting to build momentum before fundraising

Another common mistake is starting the fundraising process without priming the investors. Cold outreach will always be less effective than an introduction from someone who’s already bought into your story, so start building relationships early.

Six months before you need capital, begin networking with investors in low-stakes settings such as industry events and coffee meetups. Keep these contacts updated on your traction and wins to build buy-in and keep yourself top of mind. It’s far easier to start a funding round with warm leads and a few “anchor” investors lined up who can bring others.

Letting a “lead investor” define your terms too early

It’s a bad idea to rely too heavily on the first term sheet you receive, especially if it’s from a lead investor. While it might be tempting to accept that first offer, doing so can limit your ability to set the terms. If a lead investor proposes overly restrictive or conservative terms, other investors might follow suit, which makes it challenging to negotiate.

Instead, try to generate interest from multiple investors to give yourself options. A competitive environment often gives you the opportunity to push for terms that better fit your growth strategy and ownership goals. Remember, the first offer doesn’t have to set the precedent; hold out for one that’s in line with your vision and plans for the future.