How Small Businesses Get Funding (Especially When You're New)

Small businesses, especially new ones, get funding through a mix of personal savings, loans from friends and family, business credit cards, government-backed programs like SBA loans, and financing from online lenders. While a traditional bank loan is what many picture, it's often out of reach for businesses without a few years of revenue history.

According to the Federal Reserve's 2023 Small Business Credit Survey, younger firms face the biggest financing challenges. Firms younger than two years old that applied for financing were significantly less likely to receive the full amount they sought compared to more established firms over ten years old. This gap highlights a crucial reality: lenders see new businesses as higher risk.

Because of this, new business owners often have to be more creative and persistent. The path to funding usually involves leveraging your personal financial strength first while simultaneously building a track record for your business. This means your personal [credit score](/glossary/#credit-score) will be a major factor. You'll likely explore options that don't rely solely on business history, such as:

• Personal investment: Using your own savings (bootstrapping).
• SBA-claimed certain loans: These reduce risk for lenders, making them more willing to work with new businesses.
• Online and alternative lenders: Fintech companies often have more flexible requirements for time in business and revenue.
• Business credit cards: An accessible way to manage expenses and build business credit history from day one.

It can be frustrating to have a great business idea but struggle to get funding. The primary reason traditional banks are hesitant is risk. Lenders rely on historical data to predict future performance, and a new business simply doesn't have that data.

Here are the specific hurdles new businesses face:

Lack of Operating History

Most traditional lenders want to see at least a few years of business operations. They use tax returns and financial statements from this period to verify revenue, profitability, and cash flow. Without this history, your business plan is just a forecast, not a documented record of success.

Insufficient Revenue or Cash Flow

Lenders need to be confident you can make your loan payments. A new business may not have consistent revenue yet. They'll analyze your business bank accounts to assess your cash flow. If it's low, inconsistent, or non-existent, your application will likely be denied.

No Established Business Credit

Just like you have a personal credit score, your business can build its own credit profile. This history shows lenders how responsibly your business handles its financial obligations. New businesses start with a blank slate, which makes it difficult for lenders to assess risk. This is why many owners start with [secured credit cards](/best/best-secured-credit-cards/) or vendor trade lines to begin building a file.

Heavy Reliance on Personal Credit

When a business has no history, lenders fall back on the owner's personal financial health. They will scrutinize your personal FICO® Score and look at your [debt-to-income ratio](/glossary/#debt-to-income). If your personal credit is fair or poor, or you're already carrying significant personal debt, getting a business loan becomes much harder. Many new entrepreneurs seek out [personal loans for bad credit](/best/best-personal-loans-bad-credit/) for business use, but this mixes personal and business liabilities.

Debt financing means borrowing money that borrowers are required to pay back with interest over a set period. It's the most common form of funding. For a new business, some options are more accessible than others.

SBA Loans

The U.S. Small Business Administration (SBA) doesn't lend money directly. Instead, it stated terms a portion of the loan, reducing the risk for partner lenders (like banks and credit unions). This makes lenders more willing to approve loans for startups.

• SBA Microloans: These are smaller loans profiled for startups needing capital for inventory, supplies, or working capital. They are often provided by nonprofit, community-based intermediary lenders.
• SBA 7(a) Loans: The most common type of SBA loan. While many lenders still want to see an operating history, some are willing to fund startups, especially with a strong business plan and solid personal credit.

Online Lenders

Fintech companies have become a major source of funding for small businesses. They often use technology to speed up the application and approval process. Their requirements can be more flexible than traditional banks', sometimes accepting businesses with only several months of history and lower credit scores. The trade-off is often a higher [APR](/glossary/#apr) and shorter repayment terms. These are good for short-term capital needs but can be expensive for long-term financing.

Business Lines of Credit

Instead of a lump-sum loan, a line of credit gives you access to a set amount of capital that you can draw from as needed. You only pay interest on the amount you use. This provides flexibility for managing cash flow, buying inventory, or handling unexpected expenses. Many online lenders offer lines of credit to newer businesses.

Business Credit Cards

For many startups, a business credit card is the first financing product they can qualify for. It's an excellent tool for separating business and personal expenses, managing day-to-day costs, and starting to build your business credit profile. Some even offer introductory periods with promotional rates on purchases, which can function as a short-term, low-cost loan.

Not all funding requires taking on debt. These options involve trading a stake in your company for cash, or receiving money you don't have to pay back.

Personal Funds & 'Friends and Family'

This is often the very first source of capital. Using your own savings is called bootstrapping. Borrowing from friends or family is also common, but it's crucial to treat it as a formal business transaction. Draft a loan agreement that specifies the amount, interest rate, and repayment schedule to avoid misunderstandings and protect your relationships.

Venture Capital and Angel Investors

This type of funding is for high-growth-potential startups, not typically for main-street businesses like a local coffee shop or consulting firm.

• Angel Investors are wealthy individuals who invest their own money in exchange for equity.
• Venture Capital (VC) firms are professional investors who use a pool of money from institutions to invest in promising startups. Both expect a significant ownership stake and a high return on their investment.

Crowdfunding

Platforms like Kickstarter (for reward-based) or Wefunder (for equity-based) allow you to raise small amounts of money from a large number of people. This can be a great way to validate your product and build a community around your brand, but it requires a significant marketing effort to run a successful campaign.

Small Business Grants

Grants are essentially free money, but they are highly competitive and often designated for specific purposes, industries, or demographics (e.g., women-owned, veteran-owned, or research-focused businesses). Good places to search include:

• Grants.gov: The central database for all federal grants.
• SBA Grants: The SBA lists various grant programs it helps facilitate.
• Local Economic Development Agencies: Your city or state may offer grants to encourage local business growth.

Before you start applying for any type of funding, getting your documents and finances in order will can materially change your chances of success. A prepared entrepreneur is a credible one.

1. Write a Solid Business Plan

Your business plan is your roadmap. It should clearly explain your business model, target market, financial projections, and how you plan to use the requested funds. For lenders, it demonstrates that you have a viable plan for repayment. Even a simple, one-page plan is better than none.

2. Separate Your Finances

Open a dedicated business checking account and get a business credit card as soon as possible. Lenders want to see a clear separation between your personal and business finances. Commingling funds makes it difficult to assess the financial health of your business and can appear unprofessional.

3. Know Your Numbers (Personal and Business)

• Check Your Personal Credit: Your personal credit score is a stand-in for business credit when you're just starting. You can get free credit reports and use [credit monitoring services](/best/best-credit-monitoring-services/) to track your score. If it's not strong, focus on steps for [how to build credit fast](/answers/how-to-build-credit-fast/).
• Understand Your Business Financials: Be prepared to provide financial documents, even if they're new. This includes a profit and loss statement, balance sheet, and cash flow statement. Have several recent months of business bank statements ready.

4. Gather Necessary Documents

Lenders will typically ask for a standard set of documents. Having them ready will speed up the process. This may include:

• Government-issued photo ID
• Business licenses and permits
• Articles of incorporation or other business formation documents
• Business tax returns (if any)
• Personal tax returns

Choosing the right type of funding depends on your business's age, financial situation, and key context the money for. This table breaks down the key differences between common options for new businesses.

As you can see, there's a trade-off. Faster, more accessible options like online loans and personal loans often come with higher costs. Slower, more rigorous options like SBA loans and grants typically offer better terms. Your immediate need for capital will heavily influence your choice.

Once you've identified the right type of funding for your business, the next step is to find the right lender or partner. Not all lenders are the same, and their requirements, costs, and terms can vary significantly.

For debt financing, comparing offers is critical. Look beyond the interest rate and consider the full Annual Percentage Rate (APR), which includes fees. Pay close attention to repayment terms and any prepayment penalties. The goal is to find financing that solves a problem, not creates a new one by straining your cash flow.

Comparing the [best small business loans](/best/best-small-business-loans/) from different providers can help you see what's available for a business like yours. By reviewing multiple options, you can find a partner that understands your industry and is willing to invest in your vision for the future.