Starting a business is a daunting feat. Not only do you need a good idea and a solid business plan, but you will also need to raise the necessary funds to get your organization off the ground. Many small business owners can use their own equity to launch their companiesbut others will have to take on debt in the form of credit cards or loans.
Use the Census Bureau Annual business survey data, altLINE compiled the most common sources of startup and business acquisition capital. This 2018 survey constitutes the most recent data on sources of capital financing and continues to be referenced by reputable sources, including the Small Business Administration. The percentages were recalculated from the base figures to exclude companies that responded that they did not need start-up or acquisition capital or did not know the source of their capital.
When considering startup capital, there are two main categories of financing used by new businesses: equity and debt. According to the SBA, 3 out of 4 new businesses use your personal savings; around 1 in 5 people 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 revenue from an existing business.
Sources such as federal grants have also become more popular in the wake of the COVID-19 pandemic, and support for small businesses is increasing. In 2021, for example, the Biden administration awarded $154.2 billion in dollars of federal contracts to small businesses, up $8 billion from the previous year.
Read on to learn about the five most common sources of business startup capital.
#5. Business credit card(s)
Image credit: Canva
– Share of companies using this source of financing: 7.3%
With the federal funds rate At their highest level since 2007, credit card annual percentage rates, or APRs, are also hitting record highs. THE average interest rate on a business credit card as of April 26, 2023, was 18.78%.
This means that business credit cards are an expensive way to borrow money if you can’t repay what you owe in a timely manner. Still, they can help some businesses manage their cash flow long enough to get started. Many business credit cards offer a 0% introductory APR for a year or more, providing some flexibility to pay off startup costs over time before the high rate kicks in.
To qualify for a business credit card, you generally need a good personal credit scoreit will therefore not be accessible to everyone.
#4. Personal credit card(s)
Image credit: TORWAISTUDIO via Shutterstock
– Share of companies using this source of financing: 11.1%
You don’t need to apply for a business credit card to take advantage of its flexible payment structure. Using personal credit cards to finance your business is also an option. Many personal credit cards offer even longer introductory APR periods than business cards.
The disadvantages are twofold. First, personal credit cards typically have much lower credit limits than business credit cards, so you may 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
Image credit: Canva
– Share of companies using this source of financing: 11.2%
On the other hand, not everyone can take advantage of this option. THE median net worth of U.S. households is $121,700, but that figure is lower for people under 45, those without a college degree, residents of rural areas, and non-white Americans.
#2. Business loan from a bank or financial institution
Image credit: Mila Supinskaya Glashchenko via Shutterstock
– Share of companies using this source of financing: 21.5%
Qualifying for a business loan from a large financial institution can be difficult, especially at first. Big banks are particularly wary of lending to non-established businesses. However, many financial institutions provide loans to startups.
If you qualify for one of these loans, there’s a good chance you can get more money at a much lower interest rate than you would with a business credit card. Prices vary considerably per lender, but could even go down to single digits.
#1. Personal or family savings
Image credit: Andrey_Popov via Shutterstock
– Share of companies using this source of financing: 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 use existing equity to start a business rather than taking on debt, so you won’t have to owe interest or worry about repayment.
Unfortunately, most Americans do not have significant savings that can be used for this purpose, and this is even more true for minority communities. THE average US savings account balance is $4,500, and 42% of Americans have less than $1,000 in a savings account. There is also an important average savings gap balances based on gender, race and education level.
Screenwriter: Emily Sherman
Data report by Paxtyn Merten. Story editing by Jeff Inglis. Copy edited by Paris Close. Photo selection by Lacy Kerrick.
This story was originally published on AltLINE and was produced and
distributed in partnership with Stacker Studio.