4 Traditional Types of Startup Capital

If you are thinking about starting your own business, you are certainly concerned about having enough startup money. Even the smallest business ideas will require a couple thousand dollars at a minimum to get them off the ground. Larger ideas might require several hundred thousand dollars before you can even open your doors. 

So, what are your options? This article discusses the 4 traditional types of startup capital. There are others, but these are the most common. 

1. Your own savings.

In an ideal scenario, you would have enough of your own cash saved in order to get your business off the ground. This avoids the risk of incurring debt or the added obligations owed to investors. If you don't have the cash, some people look to their retirement savings as possible avenue, but it certainly increases the risk. This articles further explains how you can use retirement savings through a mechanism called a "Rollover as Business Startup" (ROBS).

2. Bank loan. 

If you don't have enough cash, or you want to spread the risk by keeping some of your cash, you could consider a traditional bank loan. These come in many varieties depending on the lender. In almost all situations, a lender would not issue a loan to a brand new business entity; therefore, you will likely have to incur the debt under your personal name.

In rare cases, you might qualify for a simple unsecured loan or line of credit; sometimes referred to as a "signature loan." More often, the bank will require some security and you will have to pledge your home as collateral. Another option is to explore your eligibility for an SBA loan. Be cautioned that SBA loans allocate the highest degree of risk to you, because you will have to sign a personal guaranty for the debt and you will also have to pledge collateral. 

3. Debt securities. 

In lieu of a traditional bank loan, you can consider small loans from a variety of individuals. For example, if you need to raise $100,000, you could offer to issue promissory notes in the amount of $10,000 each. If you can find 10 people that are willing to give you a $10,000 loan, you hit your $100,000 mark. This is often easier than convincing one person to give you a $100,000 loan, or qualifying for a bank loan. Be cautioned that complicated securities laws regulate an offering of debt securities. You must use specific legal documents to avoid violating these laws. 

4. Equity Securities.

Another option is to bring on investors. They could be friends and family, or venture capitalists. You can sell a portion of your company in exchange for startup cash. For example, you could give someone a 5% ownership interest in your company in exchange for $10,000. The downside is that you have to share your profits, and your investors will hold you accountable for your decisions. Again, be cautioned that complicated securities laws regulate an offering of equity securities.