Published in: Personal Loans | Oct. 28, 2019

What's the Best Source of Startup Capital?

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Thinking of starting a business? Here's where you might get the cash to do it. 

Thinking about starting your own business? You're going to need at least some startup capital to get the company off the ground.

It's often possible -- and advisable -- to start with a shoestring budget and grow your company by reinvesting as it becomes profitable. But you'll still need at least some money to get up and running. 

A man in a fashion design studio sketching ideas.

Image source: Getty Images

Make sure you're smart about where this cash comes from if you hope to set your business up for success. Fortunately, there are many sources of startup capital, including

  • savings,
  • money from a personal loan,
  • borrowed funds from family and friends,
  • money from investors, and
  • money from a business loan.

Carefully consider the pros and cons of each option to find the best way to get your fledgling business up and running. 

Starting a business with savings

Using savings can be the best way to start a company. You don't risk incurring debt that you have to pay back, even if your business isn't successful. 

Of course, you risk losing the money you saved -- and you give up the opportunity to do other things with it, such as investing it in the stock market. Still, if you're confident in your idea, investing your savings in yourself can be a great way to see if you have what it takes to be an entrepreneur. 

Using personal loan funds to start a business

If you don't have the money in savings to start a business, you could apply for a personal loan.  Personal loans can be easier to qualify for than business loans and, depending on your credit and financial situation, you may be able to get a loan with a low interest rate. 

You'll be personally liable for this loan, of course, so you'll need to be able to pay it back regardless of how the business performs. Otherwise, you risk damaging your credit. You need to be comfortable taking the chance that you may have to repay a loan -- sometimes for years -- even if the money you borrowed doesn't lead to a profitable company. 

Borrowing from friends and family to start a business

If you have friends or family members willing to invest in your future success, borrowing from them could let you avoid paying interest on a loan as you get your company off the ground. When every penny counts, an interest-free loan from loved ones could make all the difference in your ability to turn a profit early on. 

However, unless you're confident you can pay back the full amount borrowed even if the business isn't successful, you may want to avoid this option lest you risk damaging your relationships over an unpaid loan balance. 

Using money from investors to start a business

Depending on the type of business idea you have, you may be able to find investors willing to pitch in some money. 

There are many ways to find investors, from using online websites such as Kickstarter to approaching venture capital firms for a substantial investment. However, investors will only be interested if you have a truly innovative product, a solid business plan, and strong reason to believe you'll be a success.

Depending on how an investment is structured, you'll have to promise investors something. This can range from a free early version of the product for small individual investors to giving up a partial ownership stake in your company to those who make substantial investments. 

If you want to maintain complete control and make no promises, this isn't the right approach -- but the benefit of recruiting investors is that you share the risk if things don't work out.

Getting funds from a business loan to start a company

It's also possible, in some cases, to apply for a business loan. This can be guaranteed by the Small Business Administration (SBA) or made by a lender without an SBA guarantee (though SBA-backed loans will often have lower interest rates).

Business loans can be hard to qualify for. And if your company doesn't yet have established credit, you'll likely need to personally guarantee the loan -- which means putting your own assets at risk. 

Still, if you have a solid business plan, you might be able to get a business loan. And if you have an established profitable company, getting a business loan should be easier. 

Which option is right for you?

The right source of funding for your business depends on the type of company you're starting, the funds you can qualify for or obtain, and how willing you are to risk your personal assets. 

Carefully consider the pros and cons of each funding option so that you can make the right choice after considering the benefits and risks.

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