5 most common sources of business startup capital
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5 most common sources of business startup capital
A woman holding an open sign in the window of a business.
Starting a business is a daunting feat. Not only do you need a great idea and a solid business plan, but you’ll need to gather the funds to get your organization off the ground. Many small business owners can use their own equity to launch their businesses, but others will have to take on debt in the form of credit cards or loans.
Using Census Bureau Annual Business Survey data, altLINE compiled the most common sources of business startup and acquisition capital. This 2018 survey is the most recent data on capital funding sources and continues to be referenced by reputable sources, including the Small Business Administration. Percentages were recalculated from base figures to exclude companies that responded they didn’t need startup or acquisition capital or didn’t know their source of capital.
When considering startup capital, there are two main categories of funding new businesses use: equity and debt. According to the SBA, 3 in 4 new businesses use personal savings; roughly 1 in 5 use a bank loan (19%).
Other sources of startup income in both categories include a loan from family or friends, venture capital funding, or leveraging earnings from an existing business.
Sources like federal grants have also become more popular in the wake of the COVID-19 pandemic, and support for small businesses is on the rise. In 2021, for instance, the Biden administration awarded $154.2 billion in federal contract dollars to small businesses, up $8 billion from the previous year.
Read on to learn more about the five most common sources of business startup capital.
#5. Business credit card(s)
A woman sitting at a laptop with a gold credit card.
– Share of companies using this funding source: 7.3%
With the federal funds rate at its highest since 2007, credit card annual percentage rates, or APRs, are also at record highs. The average interest rate on a business credit card as of April 26, 2023, was 18.78%.
This means business credit cards are an expensive way to borrow money if you can’t pay back what you owe in a timely manner. Still, they may help some businesses manage cash flow long enough to get off the ground. Many business credit cards offer an introductory 0% APR for a year or longer, providing some flexibility to pay down startup costs over time before the high rate kicks in.
Qualifying for a business credit card typically requires a good personal credit score, so it won’t be accessible to everyone.
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#4. Personal credit card(s)
A woman at a laptop smiling.
– Share of companies using this funding source: 11.1%
You don’t have to apply for a business credit card to take advantage of its flexible payment structure. Using personal credit cards for your business funding is also an option. Many personal credit cards offer even longer introductory APR periods than business cards.
The drawbacks are twofold. First, personal credit cards usually have much lower credit limits than business credit cards, so you might not have access to the funds you need. Second, if you miss a payment or accumulate too much debt, you are responsible for paying it off as an individual, and your credit score could suffer.
#3. Personal or family assets other than owners’ savings
A young man looking over documents with his parents.
– Share of companies using this funding source: 11.2%
Leveraging personal or family assets to start your business falls into the equity side of funding rather than debt, so you won’t have to worry about interest charges or lender repayments.
On the flip side, not everyone can take advantage of this option. The median net worth of U.S. households is $121,700, but the number is lower for people under 45, those without a college degree, residents of rural areas, and nonwhite Americans.
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#2. Business loan from a bank or financial institution
A woman signing paperwork with a professional woman at a desk.
– Share of companies using this funding source: 21.5%
Qualifying for a business loan from a major financial institution can be difficult, especially when just starting. Larger banks are especially wary of lending to unestablished businesses. Still, there are many financial institutions that do grant loans to startups.
If you can qualify for one of these loans, odds are you’ll be able to secure more money at a much lower interest rate than you would with a business credit card. Rates vary significantly by lender but could even dip into the single digits.
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#1. Personal or family savings
A man writing a check.
– Share of companies using this funding source: 83.5%
Personal or family savings is the most common source of business startup capital, according to Census Bureau data. The benefits of this method are clear: You’re using existing equity to launch a business rather than taking on debt, so you won’t owe interest or have to stress about repayment.
Unfortunately, most Americans don’t have significant savings that can be used for this purpose, and this is even more true for minority communities. The average American’s savings account balance is $4,500, and 42% of Americans have less than $1,000 in a savings account. There’s also a significant gap in average savings balances based on gender, race, and education level.
Data reporting by Paxtyn Merten. Story editing by Jeff Inglis. Copy editing by Paris Close. Photo selection by Lacy Kerrick.
This story originally appeared on AltLINE and was produced and
distributed in partnership with Stacker Studio.