How to Fund Your Startup

There are a lot of different ways to finance a startup. You could save up your own money and bootstrap the business. You could borrow money from family and friends. You could even invest some funds from your 401(k) account. But for many businesses, the choice comes down to taking out a loan or raising investor capital.

The financial path you choose will affect how you run your business in some way, so you should not make this decision lightly. Borrowing and fundraising both have their pros and cons, and the best option for you depends heavily on the type of business you run and what you need the money for.

Finance and business experts shared the advantages and disadvantages of loans versus fundraising, and weighed in how to make the right choice for your business.

A loan is one of the most cost-effective ways to fund your business, said Jay DesMarteau, head of small business banking at TD Bank. If you obtain your loan through a bank or SBA (Small Business Administration) lender, you’ll usually have a lower interest rate than on a personal loan. You may even enjoy some tax benefits. Taking out a loan also gives you the opportunity to build up your business’s credit score as you repay the loan.

DesMarteau noted that the biggest advantage of a loan is retaining full ownership of your company, which won’t happen if you take on investors (more information on that below).

Cons

If you’re looking to get a traditional bank or SBA loan, the application process is very lengthy, said Jay Chang, co-founder of the personal growth and leadership resource, Achieve Iconic. You’ll also need to satisfy a long list of prerequisites, which often includes being an established business, rather than a new venture. Chang noted that loans also mean you risk losing collateral if you can’t pay off the loan.

Although alternative lenders often have much quicker approval and funding processes, they also typically charge high interest rates for that convenience. Evan Singer, general manager of SBA loan provider SmartBiz, warned business owners that while “fast financing” offers may help in a pinch, they may not be a good longer-term strategy due to the higher rates.

In some cases, both traditional and alternative lenders will put restrictions on what you can use your loan for.