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5 most common sources of business startup capital
A woman holds an open sign in a business window.
Starting a business is hard work. Not only do you need a good idea and a solid business plan, but you also need to raise the funds to get your company off the ground. Many small business owners can use their own equity to open their businesses, but others must take on debt in the form of credit cards or loans.
Using data from the Census Bureau’s annual business survey, altLINE collected the most common sources of business startups and capital acquisitions. This 2018 survey is the most recent data on sources of capital funding and continues to be cited by reputable sources, including Small Business Administration. Percentages are recalculated from base figures to exclude companies that do not require start-up or acquisition capital or do not know their source of capital.
When considering startup capital, there are two main categories of funding to use for new businesses: equity and debt. According to the SBA, 3 out of 4 new businesses use personal savings. Approximately 1 in 5 use a bank loan (19%).
Other sources of startup income in both categories include loans from family or friends, venture capital funds, or income from an existing business.
In the wake of the Covid-19 pandemic, sources such as federal grants have become more popular, and support for small businesses is increasing. In the year In 2021, for example, the Biden administration awarded $154.2 billion in federal contract dollars to small businesses, up $8 billion from last year.
Read on to learn more about the five most common sources of business startup capital.
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#5. Business Credit Card(s)
Woman sitting on laptop with gold credit card.
– 7.3% share of companies using this funding source
With the highest federal funds rate since 2007, credit card annual percentage rates, or APRs, are also at their highest. As of April 26, 2023, the average interest rate on a business credit card was 18.78 percent.
This means that business credit cards are a very expensive way to borrow money if you can’t repay what you owe on time. However, some businesses can help them manage enough cash flow to get off the ground. Many business credit cards offer an introductory 0% APR for a year or more, giving you some flexibility to pay off startup costs over time before higher rates kick in.
Qualifying for a business credit card usually requires a good personal credit score, so it’s not accessible to everyone.
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#4. Personal credit card(s)
A woman smiles at her laptop.
– Share of companies using this funding source: 11.1%
You don’t need to apply for a business credit card to take advantage of the flexible payment structure. Using personal credit cards to finance your business is also an option. Many personal credit cards offer longer APR introductory periods than business cards.
The disadvantages are twofold. First, personal credit cards often have much lower credit limits than business credit cards, so you may not be able to get the money you need. Second, if you miss a payment or accumulate too much debt, you are responsible for paying it as an individual, and your credit score can suffer.
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#3. Personal or family assets other than owners’ savings
A young man looking at documents with his parents.
– 11.2% share of companies using this funding source
Using personal or family assets to start your business falls under equity rather than debt, so you don’t have to worry about interest payments or lender fees.
On the other hand, not everyone can use this option. The median price for American households is $121,700, but the numbers are lower for Americans under 45, those without a college degree, rural residents, and non-white Americans.
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#2. A business loan from a bank or financial institution
A woman signing paperwork with a professional woman at a table.
– Share of companies using this funding source: 21.5%
Qualifying for a business loan from a major financial institution can be difficult, especially when you are just starting out. Big banks are especially wary of lending to unestablished businesses. There are still many financial institutions that offer loans to startups.
If you can qualify for one of these loans, chances are you can get more money at a lower interest rate than you could with a business credit card. Rates vary greatly by lender but can run into the single digits.
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#1. Personal or family savings
A person writing a check.
– 83.5% share of companies using this funding source
According to Census Bureau data, personal or family savings are the most common source of business startup capital. The advantages of this method are obvious: instead of taking on debt, you’re using existing equity to start a business, so you don’t have to pay interest or worry about payments.
Unfortunately, most Americans do not have significant savings to use for this purpose, and this is even more true for minority communities. The average American savings account is $4,500 and 42% of Americans have less than $1,000 in savings. There is also a significant gap in the average savings ratio based on gender, race, and education level.
Data reporting by Paxtin Merton. Story editing by Jeff Inglis. Copy editing by Paris Close. Photo selection by Lacy Kerrick.
This story originally appeared on AltLINE and was developed by
Distributed in partnership with Stacker Studios.
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