Sources of Business Funding

The Complete Guide to Startup and Small Business Funding

Kurt GraverBusiness Funding, Business Start-up Advice, Business Start-up Guides

 Raising startup funding is one of the most exciting, challenging periods for a new business, and most fail at this stage and new launch.  

Research by The Kauffman Foundation found roughly two-thirds of the companies were financed by personal savings, investments by friends and family or traditional loans. 

Here are the top seven categories of the decade-long research identified by the 5,000+ entrepreneurs interviewed by the Kauffman Foundation:

  • Banks and Other Loans – 35 per cent
  • Personal Savings – 30 per cent
  • Friends and Family – 6.3 per cent
  • Credit Cards – 6.2 per cent
  • Angel Investors – 5.8 per cent
  • Venture Capital – 4.4 per cent
  • Government Funding & Grants – 2 per cent
  • 10% of startups obtained funding from venture firms or angel investors (individual start-up backers). Among the most expensive financing mechanisms, start-ups used credit cards more commonly than angel or venture funding.

Bootstrapping and small business loans remain the most popular ways entrepreneurs finance their startups.

What this research tells us is that:

An entrepreneur’s ability or inability to find equity financing for their start-up does not validate whether or not they have a good business idea.

While not a very sexy way to finance a business, bootstrapping a start-up is still one of the most popular ways to get a business up and running.

A startup loan is a very effective way to start a business.

Why Securing Business Funding Matters

Sufficient capital provides startups and small businesses with the fuel for growth. With proper funding, companies can:

  • Transform an idea or innovation into a real product or service
  • Pay for talent, tools, technology, and workspaces needed to operate
  • Manufacture, market, and distribute offerings to customers
  • Withstand unexpected challenges and downturns  
  • Explore new strategies and opportunities as they emerge
  • Scale up to meet demand as the customer base expands

Most startups fail to get off the ground without adequate financing while existing businesses stall. The inability to secure funding is one of the top reasons new companies go under.

But funding for the sake of funding alone is unwise. Entrepreneurs must invest capital into the right priorities, resources, and strategies to generate growth and return.  

Debt Financing Sources for Businesses

Debt financing provides access to capital that must eventually be repaid, often with interest added. Repayment is required regardless of how the business performs.

Small Business Loans

Small business loans allow startups and entrepreneurs to borrow from £5,000 up to £5 million. Key features include

Interest Rates – Average competitive APRs ranging from 6-10%. Rates depend on factors like loan type, amount, and the lender.

Qualifications – Requirements vary but often include good personal credit, 1+ years in business, collateral, and a solid business plan.

Terms – Loan duration typically ranges from 1-5 years. Monthly payments of principal + interest are fixed over the term.

Use of Funds – Loans provide flexible capital for any purpose like working capital, equipment, marketing, expansion, etc.

Secured vs. Unsecured – Secured loans require an asset like equipment or real estate to back the loan as collateral. Unsecured loans do not have stricter eligibility. 

Pros of small business loans include competitive rates and flexible use of funds. Cons include strict eligibility requirements and inflexible monthly payments.

Government Small Business Loans 

Most governments have schemes that issue small grants or loans for small businesses. The application process can be long and complicated. Governmental subsidies and loans may also require match funding from the business owner. Before applying for a government-backed loan or grant, seek professional advice.

  • Below-market interest rates around 6-8%
  • Higher loan amounts and longer terms
  • Funding for a wide range of business activities and needs
  • Support for underserved groups, including minorities and veterans

While Government Loans offer attractive terms, the application process is lengthy and complex. Borrowers should have strong credit and collateral. 

Equipment Financing

Equipment loans, leases, and vendor financing allow growing businesses to purchase necessary equipment over time.

Equipment Loans provide direct financing from a lender to be repaid over 2-5 years typically. Payments are fixed.

Equipment Leases allow businesses to pay a leasing company fixed monthly instalments to use the equipment for a contract before returning it.  

Vendor Financing arrangements with equipment manufacturers or dealers break payments into more manageable instalments. 

Equipment financing makes growth more affordable but less flexible and needs more ownership benefits than purchasing outright.

Business Lines of Credit (LOCs)

Lines of credit (LOCs) provide revolving access to funding up to a set limit, like a credit card. Key LOC features include:

  • Borrowing limits typically £10,000 – £500,000+
  • Interest is charged monthly only on balances drawn
  • Flexible access to capital as needed
  • Funds usable for any business purpose 
  • Easier qualification than term loans

LOCs provide flexible working capital financing. Minimum monthly payments are required, along with interest.

Business Credit Cards 

Business credit cards offer a fast way for startups to access capital. Benefits include:

  • Instant access to funds after approval  
  • No collateral required
  • Rewards programs and cashback
  • Fraud protection and reporting 
  • Supplements’ early cash flow
  • Helps build business credit history

Downsides include variable limits, high APRs, personal liability, and tempting overspending. Still, credit cards provide convenient startup funding.

Equity Investment Sources 

Equity financing provides capital in exchange for partial ownership of a business. While more complex, equity financing enables startups to access larger capital.

Angel Investors

An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. 

Angel investors provide capital to startups at an early stage of development. They typically invest between £5,000 and £50,000 into a company.

An angel investor invests their own money in a small business in exchange for a minority stake (usually between 10% and 25%).

Angel investors are entrepreneurs or people with extensive experience in the business world.

However, angel investment is about more than just money.

Angels offer mentoring and support, and businesses that receive investment will benefit from the investor’s time, skills, contacts and business knowledge.

Angel investors usually take a hands-on approach. They will spend lots of time with the entrepreneur and help to push the business forward.

Angel investors can invest alone, but usually, they invest together as a syndicate.  This is when several angel investors work together to pool their money and experience. They can act as an adviser or even as a non-executive director.

Benefits Of Angel Investment

  • An angel investor offers strategic, financial and sector-related advice to help achieve growth.
  • Angel investors typically take a 10% to 25% share of your business, which leaves you firmly in control.
  • Angel investment can give your business credibility for later investment rounds (from venture capitalists, for example).

How to attract angel investors to your startup

You should also build a network of connections with people who might be able to help you find funding. These connections could come from friends, family members, mentors, advisors, and others.

One of the best ways to find potential angel investors is through referrals. If you know people who have invested in companies similar to yours, ask them for introductions. You might also consider contacting friends and family members who work with successful angel investors.

You should also build a network of connections with people who might be able to help you find funding. These connections could come from friends, family members, mentors, advisors, and others.

Another avenue is to participate in business plan competitions. While these can be competitive, they’re also a great way to get your foot in the door with potential investors.

Venture Capital Firms

Venture capital is an important funding source for startups, but it can be difficult to obtain. You can do a few things to increase your chances of getting venture capital for your startup. First, have a clear and concise business plan. 

Venture capitalists invest in startups because they believe that the companies will grow into big businesses. They provide funding so entrepreneurs can build new products and services people need.

Venture Capital companies tend not to invest in pre-seed businesses.  You will have to demonstrate your business has been validated in the marketplace.  This means launching your business and acquiring customers.  

Start your business with an MVP (Minimum Viable Product), a product designed to test whether there is enough interest in the market to support a full-scale launch. Your product or service should be as simple as possible while still providing customer value.

You may need to raise seed capital to launch your MVP.  You can do this with funds, bank loans, angel investments, or crowdfunding.

The Strengths & Weaknesses Of Venture Capital

The main benefit of venture capital is that it can provide the capital you need to scale your business. This can be especially beneficial if you are in a high-growth industry. With venture capital, you can invest resources and personnel to help you grow your business. 

Another benefit of venture capital is that it can give you access to experienced investors and mentors. These individuals can offer valuable advice and guidance as you grow your business. They can also help you make connections with other businesses.

The main weakness of venture capital is diluting your stake in your business.  By the end of the funding rounds, you may own a minority share of the business.  However, this share will be worth more than you ever dreamed of when you started the business.

Revenue-Based Financing

With revenue-based financing, investors provide upfront capital to businesses in exchange for a fixed percentage of future revenue until the amount is repaid, often within 6-12 months.

  • Funding without traditional qualifications requirements 
  • Flexible repayments that scale up or down with monthly revenue
  • Investor rewards tied directly to your success
  • Access to substantial capital with limited dilution 

Revenue share arrangements offer flexible growth capital without equity dilution. But businesses also limit their profit upside.

Crowdfunding Platforms

Crowdfunding websites allow startups to raise smaller investments from many backers. Popular options include:

Reward/Donation Crowdfunding – Backers support campaigns in exchange for rewards or perks.

Equity Crowdfunding – Backers buy ownership shares in startups and small businesses.

Debt/Loan Crowdfunding – Individuals loan money to companies expecting repayment with interest. 

The benefits of raising capital from the “crowd” include maintaining control and bringing on customers as investors. However, marketing efforts and public failure risks are major downsides.

Government Grants, Incentives and Resources 

Here is an additional section on government grants and incentives using the provided information:

Government Grants and Incentives

In addition to loans, the government offers a variety of grants, incentives, and programs to support small business growth. These can provide startups and entrepreneurs with valuable capital, resources, and assistance.

Direct Grants

Direct grants are cash awards for training, hiring, exporting, or capital investments. Recipients may need to match a portion of the grant amount. Direct grants are available through agencies like Innovate UK and local organisations supported by funds like the Regional Growth Fund.

Repayable Grants

Repayable grants provide funding that must only be paid back if a project succeeds commercially. This lowers the risk for grantees. Repayable grants support startups, modernisation projects, R&D, and more. Some repayable grants cover up to 75% of eligible costs.

Tax Credits

R&D tax credits allow companies to reduce their tax burden based on qualifying research and development expenditures. This helps offset innovation costs and encourages continued R&D spending.

Soft Loans

Soft loans offer flexible, generous repayment terms to certain organisations like charities, social enterprises, and young entrepreneurs. This specialised type of loan may have below-market interest rates, longer repayment timelines, or other beneficial conditions.

Subsidised Services

Some government programs offer free or discounted services like mentorship, facilities access, or industry-specific training courses to assist small business growth. These subsidised services provide valuable resources and guidance.

Grants, incentives and programs make valuable capital, knowledge, and tools accessible to startups and entrepreneurs. While application processes can be extensive, government support can accelerate small business success.

Factors to Consider When Choosing Funding

Every startup and small business has unique funding needs and constraints based on factors like:

  • How quickly capital is required
  • What stage of growth the business is in
  • If the entrepreneur wants to retain full control
  • How much equity the founder is willing to relinquish
  • The financial qualifications and credit history of the business
  • The ability to take on debt that must be repaid

Understanding your specific objectives, needs, limitations, and risks helps determine suitable financing options.

Getting Funding From Friends, Family & Personal Savings

Before approaching professional investors or lenders, many entrepreneurs raise initial capital from personal connections and resources:

Friends & Family 

Borrowing money from friends and family allows founders to access startup capital from people who already know and trust them. This provides more flexibility than professional funding early on.

However, failing to formalise investment terms can brew discontent later. Outline clear agreements defining whether funds are loans or equity investments. Treat even informal deals professionally.


Many entrepreneurs “bootstrap” their startups by self-funding costs through personal savings, credit cards, earnings from side work, etc. This allows founders to retain control and flexibility.

However, bootstrapping severely limits growth potential in most cases. Once concepts are proven, approaching other sources can provide the capital necessary to realise a business’ potential fully.

Here is an additional section on startup funding stages:

Stages in Startup Funding

Funding a startup is a multifaceted journey, often requiring a strategic approach to capital acquisition as the business evolves. Recognising that a single initial capital injection is seldom sufficient for a business’s long-term growth and sustainability is crucial. As such, entrepreneurs may navigate through several funding rounds, each tailored to their startup’s specific needs and maturity at different stages.

1. Idea Phase: This initial stage is characterised by the founder’s commitment to developing a nascent business concept in terms of time and personal financial resources. It is a critical phase where the groundwork for the future business is laid, and the idea’s feasibility is assessed.

2. Pre-Seed Phase: In this phase, the founder extends their circle to include co-founders, friends, and family. This is often a period of refining and enhancing the initial idea, leveraging a trusted inner circle’s skills, insights, and financial contributions.

3. Seed Phase: At this juncture, the founders generally have a solid business plan and are ready to introduce their concept to the market. They seek external funding, which may come in various forms, such as grants, loans, or crowdfunding. This phase is pivotal as it often represents the first significant influx of external capital.

4. Early Stage Phase: Having gained market traction and developed a prototype or initial service offering, the company is now positioned to seek more substantial funding. This is typically sourced from angel investors or accelerators, entities equipped to nurture the startup through this critical growth phase.

5. Late Stage Phase: In this stage, if the startup demonstrates rapid growth and significant market potential, it becomes attractive to venture capital investors. These investors can provide large capital injections essential for scaling the business to new heights.

It is important to note that the journey through these stages is sometimes linear. Some startups may leapfrog stages, moving directly to venture capital or adopting a bootstrapping approach, relying on internal cash flow to fuel growth. However, understanding this typical progression provides a valuable framework for entrepreneurs. It enables them to strategically identify and target the most suitable sources of capital at each stage of their business’s growth.

The journey of funding a startup is a dynamic and evolving process. Entrepreneurs must be adept at assessing their current stage, understanding the funding options available, and strategically planning for future capital requirements. This approach not only ensures the immediate financial needs of the startup are met but also lays a strong foundation for sustainable growth and success.

Sources of Funding By Business Type

In business funding, the suitability of various financing options can vary significantly depending on the nature of the business. This diversity in funding accessibility is crucial for entrepreneurs to understand as they seek financial support for their ventures. Here’s an analysis of different business types and their corresponding compatibility with various funding sources:

1. Technical or Engineering: These businesses are well-positioned to secure funding from various sources, including friends and family, investors or venture capitalists, crowdfunding platforms, bank loans, government loans, and grants. Their technical nature often makes them attractive to a broad spectrum of investors.

2. Live Events, Experiences, Entertainments: Funding for these types of businesses is more likely to come from friends and family, crowdfunding, and possibly government loans. However, securing bank loans and grants and attracting investor or VC interest can be challenging.

3. Technology: Technology ventures broadly appeal to all major funding sources, including friends and family, investors or VCs, crowdfunding, bank loans, government loans, and possibly grants. Their innovative nature and scalability make them attractive to diverse funding bodies.

4. Education / Training: These businesses are generally well-received by all funding sources, reflecting the essential nature of education and training services.

5. Memberships: Membership-based businesses are most likely to receive funding from friends and family and through crowdfunding. However, they may need help in securing funding from investors or VCs, bank loans, government loans, and grants.

6. Custom-Made Products: These businesses can expect funding from friends and family, investors or VCs, and crowdfunding. However, they might find it challenging to secure bank loans, and their eligibility for government loans and grants is still being determined.

7. Local Businesses: Local enterprises have a good chance of securing funding from nearly all sources, including friends and family, investors or VCs, crowdfunding, bank loans, government loans, and possibly grants.

8. Religious, Social Or Movement: These entities can generally secure funding from friends and family, crowdfunding, possibly investors or VCs, and government loans. They also have a good chance of obtaining grants.

9. Fashion & Accessories: These businesses will likely find funding from friends and family, crowdfunding, and possibly government loans and grants. However, attracting investor or VC interest and securing bank loans can take more work.

10. Analytical & Research: Funding for these businesses is most likely to come from friends and family, possibly investors or VCs, and grants. However, crowdfunding, bank loans, and government loans might be less accessible.

11. Sports or Hobby-based: These businesses have a good chance of securing funding from all sources, reflecting the broad appeal of sports and hobby-related ventures.

12. Children-based: Businesses focused on children’s needs and services are well-positioned to attract funding from all sources.

13. Food & Drink related: These ventures can generally secure funding from friends and family, investors or VCs, crowdfunding, bank loans, government loans, and grants.

14. Health / Wellbeing: These businesses are likely to receive funding from friends and family, investors or VCs, possibly crowdfunding, and government loans. However, securing bank loans can be challenging.

15. Environmental: Environmental businesses are attractive to all funding sources, reflecting the growing importance and interest in sustainability.

16. Construction: These businesses can expect funding from friends and family, investors or VCs, possibly crowdfunding and bank loans, and government loans.

17. Domestic Services: Funding for these businesses will most likely come from friends and family, investors or VCs, and government loans. However, crowdfunding, bank loans, and grants might be less accessible.

18. Media broadcasting: These ventures can generally secure funding from friends and family, investors or VCs, crowdfunding, bank loans, and government loans.

19. Marketing & PR: These businesses will likely find funding from friends and family, investors or VCs, and government loans. However, crowdfunding, bank loans, and grants might take more work to secure.

20. Business Services: These ventures are well-positioned to attract funding from friends and family, possibly investors or VCs, bank loans, and government loans. However, crowdfunding and grants may be less accessible.

21. Travel & Leisure: These businesses can generally secure funding from friends and family, investors or VCs, crowdfunding, possibly bank loans, and government loans.

The suitability of different funding sources varies widely across business types. Entrepreneurs must carefully consider their business’s nature and the funding landscape to strategically target the most appropriate and accessible sources of capital. This tailored approach to funding is crucial for their ventures’ successful launch and growth.

Pros and Cons of Different Financing Options

Type of FinancingProsCons
Small Business LoansCompetitive rates and terms, flexible use of fundsStrict eligibility requirements: debt must be repaid
Government LoansAttractive rates and long repayment termsIntensive application process with lots of documentation
Business Lines of CreditAccessible capital for short-term needsHigher interest rates, minimum monthly payments
Business Credit CardsFast funding, even for new businessesHigh interest rates, personal liability, low limits
Angel InvestorsEarly-stage capital and adviceGive up equity, shared decision-making
Venture CapitalLarge amounts of growth financingVery competitive, give up substantial equity
Revenue Based FinancingFlexible “no strings attached” fundingLimit upside by sharing future revenue
CrowdfundingMaintain control, pre-sell productMajor marketing efforts, public failure risk
Government GrantsDo not require repaymentHighly competitive and lengthy process

Documents You Need To Start Your Business 

A well-structured business plan should be the main document you need to:

  • Prove your concept
  • Set up your business
  • Gain funding from most sources, including attracting loans from family and friends and investment from Angel Investors and VCs.

Most business plans include

  • Problem definition and value proposition
  • Business Strategy
  • Target market
  • Competitive analysis
  • Sales and marketing strategy
  • Management Team
  • Go To Market Plan
  • Financial Plan
  • Exit Strategy – This is mainly for investors and should include a plan for how you will repay them and how they can exit the company.

Not all Business Plans are the same. For instance, you will need a far more detailed business plan for Angel Investment and VCs.

Friends & Family & Bootstrapping

Your business plan should focus on the value proposition of your business and its viability.

Family and friends know you, your skills and your experience.  To convince them to invest or loan you the money, you need to show that the idea is viable and you will be able to pay them back.


Banks are fairly easy to predict.  They want to ensure they will get their money back and interest payments.

Banks usually want you to secure personal assets against the loan.

If you are applying for an unsecured loan, you will need to prove that the business is viable, that you know how to manage the business, and that you have a solid sales and marketing plan.

Angel Investment

Business angels are looking for new innovative businesses within their field of expertise that have the potential to grow into a large business.

Initial investment from an angel can be just the first step in several funding rounds. Make it clear in your business plan what to do with the money and where it will take the business.

Venture Capital

VCs make their money by investing in high-growth businesses.

To justify investment from a VC, you will need to be able to provide an in-depth analysis of why your product or service has the potential to scale and be successful. You have the management team to grow the business and 

VCs are looking for businesses with mass market potential.  Your business model has to be disruptive and potentially become a global business or, at the very least, a national one.  

Remember, they will be investing lots of money into your business, so your sales forecasts need to be realistic but ambitious. 

Pitch Deck

A pitch deck presentation—a startup pitch deck or slide deck—is a visual document that provides investors with essential information about your business plan, product or services, fundraising needs, and key metrics like valuation, target market, and financial goals.

It’s important to ensure that your pitch deck is well-designed and professional, as this will give investors a good impression of your business. 

Financial Projections

Any investment or funding you seek will require realistic and robust financial projections for the next 3-5 years.  

This will include

  • Sales projections
  • Profit & Loss
  • Cash Flow
  • Balance Sheet
  • Startup Costs
  • Financial projections
  • Exit Strategy (This is usually just for Angel Investors and VCs)

It’s also a good idea to include sensitivity analysis, which analyses how the business will look if you do not hit your sales targets or your costs are higher than expected.  This will allow the investor to understand how much funding the business could need.

If you want to attract angel investors to your startup, you need to prepare for due diligence. 

Investors want to see that you understand the opportunity and how you plan to capitalise on it. This means having all your financial documentation in order and being able to answer any questions investors may have about your business. 

Build a strong team.

Investors will also want to see that you have a strong team with the skills and experience necessary to execute your plan. To convince them to invest in your startup, you must show them you have a clear vision and a solid plan for making your business successful.

A good team will help you build an effective product. You need people who understand what you do and why you exist. They also need to be able to communicate effectively with customers.

Conclusion: Choosing the Right Funding Mix for Your Business

Determining the ideal funding solutions for your startup or small business is a complex process that requires a thorough evaluation of multiple factors. There is no one-size-fits-all approach. The optimal funding mix will depend on your company’s growth stage, industry, business model, future goals, and risk tolerance. 

In the early days, tapping into personal savings and support from friends and family allows you to launch and validate your concept without giving up equity or taking on debt. Once you gain traction, small business loans and lines of credit provide flexible working capital to keep operations running smoothly. 

When you’re ready for more aggressive expansion, equity financing from angels or venture capitalists delivers larger capital injections to accelerate growth, but this comes at the cost of diluted ownership. Revenue-based financing lets you access significant funds by sharing future income instead of equity. Government grants and incentives offer non-dilutive capital to qualifying organisations.

There are pros and cons to every funding source. Analyse your company’s current capital needs and qualifications. Weigh factors like growth stage, industry norms, willingness to relinquish control, and risk appetite. Build relationships with investors and lenders before you need them.

Aim to create a diverse funding mix that provides the right amount of capital at each growth phase while allowing you to maintain your strategic vision. With the funding landscape evolving rapidly, stay adaptable and explore innovative new financing solutions as they emerge.

The journey to funding your entrepreneurial dreams requires tenacity, creativity and a thoughtful strategy. But with hard work and the right funding mix, your startup can become a thriving business impacting the world.