Congrats! You’ve got a great side hustle idea … now you just need money to get it off the ground.
Even though many small businesses can have pretty low startup costs, most will still require at least some startup capital.
And having enough money to start and grow your business is important. According to a recent study by CB Insights, 38% of startups fail because they can’t raise new capital. Similarly, “money” is consistently among the top struggles for side hustle founders.
In this guide, I’ll share the most popular ways to fund your new business, so you can choose the path that makes the most sense for you.
I’ll also share real-life examples of how some of the biggest brands in the world got the funding they needed to grow.
Ready? Let’s do it!
3 Primary Types of Startup Funding
There are three primary types of financing for new businesses:
Bootstrapping
Debt financing
Equity financing
The main difference between them is ownership.
Bootstrapping is about investing your personal cash and funding streams.
Debt finance involves borrowing money from an external source like a bank. You agree to repay the borrowed amount plus interest over a set period.
Both these options allow you to maintain control of the business.
On the other hand, equity finance involves selling shares or ownership stakes to investors. This means you can access funds without incurring debt. But you will have to share ownership and potential future profits with investors.
1. Bootstrapping: Build From the Ground Up
Bootstrapping is how most small businesses and side hustles get started.
Instead of seeking funds from investors or lenders, you rely on your own money and hard work to build your business.
According to the U.S. Chamber of Commerce, 78% of small business owners use their own funds to start their businesses. Bootstrapping is how I started my first business, and how the vast majority of Side Hustle Show guests started theirs.
Bootstrappers take a lean approach. You focus on the essentials, trim unnecessary expenses, and make sure every cent counts. It’s about being resourceful, stretching your dollars, and learning to do more with less.
Real-Life Example: Mailchimp
In 2001, Ben Chestnut and Dan Kurzius co-founded Mailchimp with just $700 of their own money. Rather than seeking external funding, Mailchimp reinvested profits and cut costs wherever possible.
They started in a small apartment, handling everything from coding to customer support.
Mailchimp has grown into a platform that serves millions of customers worldwide. They have achieved incredible success, all while retaining ownership of their company.
Tips for Bootstrappers
Start Lean: Focus on the essentials and avoid unnecessary expenses. Keep your overhead costs low and prioritize what’s crucial for your business to function.
Do-It-Yourself (DIY): Take on tasks that you can handle yourself initially. It’s an opportunity to learn essential skills that will help you run your business.
Negotiate Everything: Try to get the best deals with suppliers, vendors, and contractors. Small savings can add up over time.
2. Friends and Family: Get Support From Your Inner Circle
Friends and family want to see you succeed. They may be able to offer financial backing to help you start your business.
A recent study from Clutch found that 22% of founders received funding from friends or family in the first three months of launching their businesses.
But this isn’t something you want to rush into — the last thing you want is to strain relationships with people close to you.
You need to be as open and transparent as possible. Share your vision for the business, and outline the potential risks and rewards. Transparency is essential to ensure everyone is on the same page.
Real-Life Example: Warby Parker
The eyewear company Warby Parker is an inspiring real-life example of how support from friends and family can lead to success.
In 2010, four friends, Neil Blumenthal, Andrew Hunt, David Gilboa, and Jeffrey Raider, came together with a vision. They wanted to sell stylish, affordable eyewear while positively impacting the world.
At the outset, they turned to their friends and family for funding. A significant portion of their initial seed capital came from this supportive network.
Today, Warby Parker has disrupted the eyewear industry and is a globally recognized brand.
Tips for Seeking Funding from Friends and Family:
Be Clear and Honest: Mixing your business and personal life always comes with challenges. Be honest and open about your business plan and the potential risks and rewards.
Treat it Professionally: You’re entering a legal agreement, so treat it professionally. That means formalizing agreements in writing and clarifying expectations.
Deliver on Your Promises: If you commit to repaying a personal loan or providing a return on investment by a certain date, make sure you deliver.
3. Business Credit Cards: Convenient Cash Flow Funding
Business credit cards work similarly to personal credit cards. You can access a revolving line of credit to make purchases, manage expenses, and address cash flow gaps.
It’s a popular way to access credit. Around 67% of small business owners currently have a business credit card.
They often come with perks like cashback, travel points, or discounts on business-related purchases.
While business credit cards can be a helpful funding tool, they have potential pitfalls. You’ll need to keep up with monthly repayments and use them responsibly to avoid falling into debt traps.
Real-Life Example: Are You Watching This?!
When Mark Philip launched his real-time sports analytics company in 2007, the financial crisis was just getting started.
He was unable to raise money from traditional routes, so he used business credit cards to support early growth.
However, it wasn’t until 2013 that Mark made his final credit card repayment. Credit cards can be helpful to cover short-term costs, but it’s easy to mount up debts.
Tips for Using Business Credit Cards:
Make Timely Payments: Pay credit card bills on time to maintain a positive credit history and avoid late fees.
Separate Business and Personal Expenses: Keep your business and personal expenses separate. Get a dedicated business credit card to avoid confusion and simplify bookkeeping and tax reporting.
Take Advantage of Promotional Offers: Some credit cards offer an introductory period with 0% rates on purchases or balance transfers. This can be useful if you have significant business expenses coming up or want to consolidate existing debt. Just ensure you pay off the balance before the promotional period ends.
4. Bank Loans: The Traditional Funding Route
Business loans are a tried and tested way to secure capital. In 2021, 34% of small businesses applied for a loan.
A bank loan provides a lump sum that must be repaid over a specified period, usually with interest.
From traditional term loans to Small Business Administration (SBA) loans, each type of bank loan serves different purposes.
Factors like interest rates and collateral requirements play a vital role in deciding which option is right for your business.
Real-Life Example: Patagonia
Patagonia is an excellent example of a business that utilized bank loans to fuel its expansion. In the early 1990s, the well-known outdoor clothing company experienced a significant increase in product demand.
Patagonia sought financing through bank loans to keep up with demand and expand its operations.
The company’s approach to borrowing allowed it to continue growing while staying true to its sustainability mission.
This example highlights how bank loans can be valuable for companies. You can finance growth while preserving ownership and control.
Tips for Securing a Bank Business Loan
Improve Creditworthiness: You’ll need a healthy credit score and strong financial profile to secure good interest rates from lenders.
Be Prepared: Gather all necessary financial documents and be ready to provide information to support your loan application.
Borrow Responsibly: Only borrow what you need and have a solid plan for repaying the loan on time.
5. Crowdfunding: Turn Believers Into Investors
Crowdfunding is a way to raise funds by collecting small contributions from many individuals. This type of business finance is typically done through online platforms like Kickstarter.
On average, crowdfunding backers pledge $88 per project. So you need a lot of backers to raise significant funds.
There are several crowdfunding models, including:
Reward-Based Crowdfunding: Individuals contribute in exchange for a tangible perk or product.
Donation-Based Crowdfunding: Backers don’t expect anything in return other than the satisfaction of supporting a cause or project they believe in. Commonly used for charitable and social causes.
Equity-Based Crowdfunding: Investors can earn financial returns if the company becomes successful.
Lending-Based Crowdfunding: Also known as peer-to-peer lending, this type of crowdfunding involves individuals lending money with the expectation of being repaid with interest over time.
Each type of crowdfunding serves different purposes. Choosing the right type depends on the nature of your business and the goals of your fundraising campaign.
Real-Life Example: Oculus Rift
Oculus Rift is a standout success story in reward-based crowdfunding.
In 2012, Oculus launched a Kickstarter campaign to fund the development of its groundbreaking virtual reality headset, Oculus Rift. The campaign aimed to raise $250,000.
The promise of an immersive virtual reality experience captured the imagination of potential backers. The campaign quickly gained momentum, surpassing its funding goal within hours.
By the time the Kickstarter campaign ended, Oculus had raised over $2.4 million from over 9,500 backers.
The success of the campaign attracted further investment, leading to Oculus being acquired by Facebook for $2 billion in 2014.
Tips for Running a Successful Crowdfunding Campaign:
Time Your Campaign Wisely: Plan your campaign launch strategically. Consider seasonal trends and industry events that may impact your campaign.
Choose the Right Platform: Research crowdfunding platforms to find the best place for your campaign. Consider the user base, fees, and other factors.
Build a Strong Online Presence: Start building your online presence before launching your campaign. Engage with potential backers through social media and other channels to get the word out.
6. Government Grants: Get Financial Support
Government grants are financial assistance given to support startups and small businesses. They’re typically used to aid economic growth in specific industries and create more jobs.
There are currently 2,716 grant programs offered by 26 different grant-making agencies.
Unlike loans, these funds do not need to be repaid. That makes them an attractive option for entrepreneurs seeking financial support without taking on debt.
But there’s no such thing as a free lunch.
Securing a government grant for your startup isn’t easy. Each program has unique eligibility criteria. The application process can also be complex and competitive.
Real-Life Example: Ryvid
In 2022, the electric motorcyle company Ryvid received a $20M grant from California.
The state wanted to invest in clean-energy transportation and support job growth. Ryvid expects to add up to 900 full-time motorcycle and lithium battery manufacturing jobs in California.
Tips for Navigating Government Grants:
Watch for Unique Opportunities: Subscribe to newsletters like Danielle Desir-Corbett’s Grants for Creators to keep up-to-date on grant opportunities.
Check Eligibility Criteria: Don’t waste time and effort chasing a grant you’re ineligible for.
Prepare a Strong Application: Clearly state your objectives, how you plan to achieve them, and the potential impact of your project. Provide evidence and data to back up your claims.
Be Diligent and Patient: The application process may take some time. Be prepared to wait and follow up as needed.
7. Angel Investors: Pitching For Startup Capital
Angel investors are typically looking to invest in startups with high growth potential. They are experienced entrepreneurs, industry experts, and successful business people with substantial wealth.
These individuals often play an active role in the companies they invest in. More than 50% of angel investors have experience as entrepreneurs.
They can offer mentorship and valuable industry connections to help you succeed.
You’ll need to craft a compelling pitch to attract potential investors. Share your story and commitment to making your startup successful.
Authenticity and passion can be the X-factor that differentiates your pitch from the rest.
Real-Life Example: Airbnb
Airbnb is an iconic example of angel investor support leading to massive success.
In 2009, Airbnb founders Brian Chesky and Joe Gebbia struggled to keep their accommodation-sharing platform afloat. They had a compelling vision but needed more funds to fuel its growth.
Enter Paul Graham, an angel investor and the co-founder of Y Combinator. Impressed by the founders’ passion and innovative approach, Graham invested $20,000 in Airbnb.
With the support of Graham and subsequent angel investors, Airbnb thrived. It’s now a global phenomenon transforming how people find accommodation.
The company’s valuation has soared to billions, making it one of the most successful startups in history.
Tips for Captivating Angel Investors:
Tell a Compelling Story: Craft a pitch that conveys your vision, the problem you’re solving, and your startup’s unique value.
Showcase Passion and Dedication: Demonstrate your commitment and willingness to learn from experienced investors.
Be Persistent: Finding an angel investor isn’t easy. Get comfortable with receiving setbacks and keep pushing.
8. Venture Capital: Attracting the Right Investors
Venture capital (VC) firms pool money from various sources to create funds. These VC funds are dedicated to investing in startups with high growth potential.
Unlike traditional bank loans, venture capitalists want equity in exchange for investment.
VC firms typically take on higher risks than traditional lenders. They hope to achieve substantial returns if the startup succeeds and grows significantly. In 2022, the median deal size of venture capital-backed companies in the seed stage was $1.55 million.
You’ll need to show proven market demand and a clear growth path to attract investment from a VC firm.
Real-Life Example: Uber
In 2011, the ride-hailing giant was a promising startup with ambitious growth plans. To achieve its lofty goals, Uber secured an early investment of $11 million from Benchmark Capital.
Benchmark Capital saw the potential in Uber’s disruptive business model and the rising demand for convenient ride-hailing services.
This partnership proved to be a game-changer. Uber expanded rapidly and became a global phenomenon.
Tips for Wooing Venture Capital Firms
Demonstrate Traction: Show evidence of market demand. That could be a growing user base or rapidly increasing sales figures.
Highlight Growth Potential: Have a clear vision for scaling and making a mark in your industry. VC firms invest in high-potential startups with ambitious growth plans.
Negotiate: Don’t underestimate your worth or sell yourself short.
9. Trade Credit: Leverage Vendor Relationships
Trade credit is a financing arrangement between a buyer and a supplier. The supplier extends credit terms to the buyer, allowing them to purchase goods on credit and defer payment to a later date.
This helps businesses to keep their shelves stocked. They can meet demand while preserving cash for other essential expenses.
Trade credit is key to the national and global economy. According to the World Bank, the annual volume of domestic and international trade credit comes to over 40% of world GDP.
You’ll need to build a strong relationship with suppliers to secure trade credit terms. It’s not something that many suppliers offer first-time buyers.
You’re more likely to secure trade credit if suppliers see you as a potentially lucrative long-term customer.
Real-Life Example: Walmart and Procter & Gamble
Walmart relies on strategic trade credit arrangements with suppliers like Procter & Gamble (P&G).
P&G extends credit terms to Walmart, allowing the retailer to maintain its inventory levels without straining cash reserves. This means Walmart can consistently stock a wide range of P&G products on its shelves.
In return, Walmart provides P&G with a steady and high-volume customer. P&G can be confident in its sales projections and manage its production and distribution processes more efficiently.
Tips for Nurturing Trade Credit Relationships:
Start Small: If you’re a new business, start with smaller orders to prove reliability and build trust with suppliers.
Demonstrate Growth Potential: Convince suppliers that offering credit terms can be mutually beneficial by highlighting strong growth potential.
Build Strong Relationships: Walmart and P&G didn’t collaborate closely from day one. It takes time to demonstrate reliability and build the partnership.
10. Factoring and Invoice Financing: Turn Unpaid Invoices Into Working Capital
Factoring and invoice finance are types of business financing that can help you manage cash flow. You can use outstanding customer invoices as collateral for funding.
There are a few differences between factoring and financing.
With factoring, you essentially sell your unpaid customer invoices to a third-party company (the factor) at a discount. The factor will provide an immediate cash sum and collect the customer payment when the invoice is due.
On the other hand, invoice finance is using your outstanding invoices as collateral to secure a revolving line of credit or a lump sum loan. You’ll still be responsible for collecting customer payments.
There are confidential invoice discounting solutions if you don’t want your customers to know about the funding arrangement.
Real-Life Example: Coca-Cola and Taulia
Coca-Cola has thousands of suppliers and distributors around the world. Managing that huge network can create cash flow issues.
Coca-Cola turned to Taulia’s invoice financing platform to strengthen its supplier relationships. Taulia’s platform allowed Coca-Cola to offer early payment options to its suppliers.
Suppliers who needed help managing cash flow could access faster payments at a discounted rate.
Invoice financing helped Coca-Cola enhance its supplier relationships. It earned a reputation as a supportive partner in the supply chain.
Tips for Factoring and Invoice Financing
Research Providers: There are hundreds of invoice factoring businesses in the US. Explore your options and compare terms and rates before signing any contracts.
Read the Fine Print: Some lenders require minimum-term contracts and have additional fees on top of the agreed interest rate.
Consider Confidentiality: This will allow you to retain control over the collections process and maintain a direct relationship with your customers.
11. Equipment Financing: Powering Productivity for Startups
Equipment financing can help businesses get the machinery, technology, and equipment they need. It includes alternative funding options like short-term loans, equipment leases, and hire purchase plans.
According to Forbes’ 2023 Business Loan Survey, equipment purchases are the second most popular reason for seeking a business loan.
It can be a good option if your startup business needs equipment or vehicles to expand. You can get what you need to grow without stretching working capital too thin.
There are a bunch of different types of equipment finance types. You can choose from leases and commercial chattel mortgages to rentals and term loans.
Real-Life Example: Computertrans
Computertrans is a leading logistics provider in Australia. In 2019, they found that cash flow wasn’t keeping up with growth.
Computertrans needed to expand its fleet of vehicles to meet customer demand, but didn’t have the cash on hand to make that happen.
Equipment finance allowed them to acquire the vehicles they needed without paying the full purchase price upfront. The lender initially paid for the new fleet, with Computertrans making monthly repayments.
Tips for Making the Most of Equipment Financing
Assess Your Equipment Needs: Avoid financing unnecessary or excessive equipment.
Understand Your Budget: Calculate how much you can afford to repay comfortably each month without straining your cash flow.
Shop Around for the Best Rates: Compare rates from different lenders to secure financing on the most favorable terms.
Choosing the Right Type of Startup Funding for Your Side Hustle
There are plenty of funding options for new businesses. Each comes with its unique advantages and considerations.
Carefully assess your financial needs and risk tolerance. It’s also important to focus on your long-term goals when selecting the most suitable financing option.
You’ll likely need a funding mix to cover your long-term and short-term financing needs. A balanced approach can help mitigate risks and optimize your financial strategy.
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Big thanks to George Drennan for helping research and draft this post! George is a freelance writer and expert on all things business. He’s passionate about demystifying the complexities of finance and helping people access information they can use to improve their lives.
