“The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men.”
— Jules Winnfield, Pulp Fiction (1994)
So, you’ve made it through the first two parts of this series, and now you’re ready to talk about what funding sources might actually be available to you as a startup. Let’s start with the holy grail of lending—traditional bank loans.
Traditional Bank Lending: The Dream (If You Qualify)
If you’ve got industry experience, enough collateral to fully secure the loan (think cash, equity in homes or other real estate, or retirement savings—not your vintage baseball card collection), and good personal credit, congratulations! You just might be one of the rare few who can qualify for a loan at a bank.
Banks are risk-averse institutions. They want to lend money where they have a near 100% chance of getting it back with interest. So, they’re looking for businesses with proven leaders, substantial collateral, and low personal risk. If you check all those boxes, a traditional bank loan could give you access to the capital you need with relatively favorable terms.
But let’s be honest—most startups don’t have all of those ducks in a row. That’s where SBA Lending comes in.
SBA Lending: Taking on More Risk—With Strings Attached
SBA loans, backed by the U.S. Small Business Administration, are designed to help small businesses secure financing they might not otherwise get from a traditional bank. The government guarantees up to 90% of the loan, which means lenders are willing to take on more risk. Sounds great, right? But here’s the catch: startups are still considered risky.
To qualify for an SBA loan as a startup, you’re still going to need some industry experience, possibly some collateral, and usually at least average personal credit. The SBA guarantee helps reduce the lender’s risk, but they’re still going to want to know you’ve got a reasonable shot at success.
But Wait—“If I Had Collateral, I Wouldn’t Need a Loan!”
At this point, you might be thinking, “If I had collateral worth the value of the loan, I wouldn’t need a loan at all!” And you wouldn’t be alone in that thought. Many startups struggle with this exact problem: you need money to grow, but you don’t have enough valuable assets to convince a lender to take a chance on you.
This is where you need to focus on patient capital—capital that gives you breathing room while you establish your track record, cross over to profitability, and confirm that you’ve got product-market fit. This is the crucial stage where you’re figuring out if people really want what you’re selling and if your business model can turn a profit.
When Patient Capital Is Key
When you’re just starting out, the last thing you want is a loan with short repayment terms or high monthly payments that squeeze your cash flow. You need capital that either doesn’t have to be paid back at all or has the longest repayment terms possible.
Here’s are some options that we would call patient capital::
1. Savings or Cash Earned from Positive Cash Flow: Money that you don’t owe anyone is always the best option. It gives you complete flexibility to reinvest into the business without worrying about repayment.
2. Equity Investment: Selling a piece of your company in exchange for capital might not be your first choice, but it’s worth considering, especially if it means you don’t have to deal with loan repayments. The trade-off is giving up some ownership, but that can be better than putting your business under the strain of debt in the early stages.
3. Grants: Free money that you don’t have to pay back? Yes, please. Grants are competitive, but they’re worth exploring as an option for funding without the strings of repayment.
4. SBA Loans and Microloans: These come with long repayment terms and relatively low interest rates, making them a solid option for startups that need time to generate revenue. The longer the terms, the more patient the capital.
5. Friends and Family: Sometimes your best shot at early capital comes from people in your close network. Friends and family might not have the rigid requirements that banks do, but tread carefully—mixing money and personal relationships can get tricky fast. Be upfront about the risks and make sure any loans are well-documented to avoid misunderstandings down the road.
6. Crowdfunding: Platforms like Kickstarter or Indiegogo allow you to raise money from a broad audience. It’s a way to access capital without giving up equity or taking on debt, but the challenge lies in convincing a crowd to back your business idea. Crowdfunding can be an effective way to gauge interest in your product and generate buzz at the same time.
But here’s the key takeaway: budget your startup financing needs around the experiment of determining product-market fit first—not based on pie-in-the-sky dreams of building an empire right out of the gate. Your primary focus should be testing and learning, not stretching yourself thin with unrealistic expectations. Budgeting with this idea in mind will greatly increase your chances of getting the funding you are looking for. All things being equal, it’s easier to get less money than more money.
What’s Next?
Once you’ve built up at least 6-12 months of solid sales history, responsibly using online funding options like working capital loans or lines of credit becomes more feasible. By this point, you’ll have proven that your business has legs, and lenders will be more comfortable extending credit.
As a closing thought, enough books have been written to fill a library on each of the funding options listed above, and over time, at BrokerFreeCapital, we’ll delve into each of these topics much more specifically. But at the end of the day, banks are always going to want near-complete security to lend you money, and there’s no sense in fighting it. Admit this reality to yourself, and adjust your thinking accordingly.
Related Posts
Business Loans for Startups, Part 1: Why Banks Won’t Touch Your Brilliant Idea with a Ten-Foot Pole
Business Loans for Startups, Part 2: Defining a Startup and Why Banks Still Want a Track Record
Business Loans for Startups, Part 3: The Path to Responsible Funding