The different types of startup financing

October 05, 2023

Consider these pros, cons and tips before you decide how to fund your small business.

Starting a business comes with a wide range of challenges, but how to fund it is often a major one. Getting a business off the ground costs $30,000 on average1, and records show 50 percent fail within the first five years.2 Many banks don’t offer small business loans until a business is established — in business at least two years — with a credit history and record of income. Until you qualify, you might be considering other sources of money. Explore the four most common below, including their pros, cons, what to consider and tips from Eric Tunbridge, senior product manager at U.S. Bank.



Fintech — short for financial technology — is growing in popularity. These startups tend to lend to businesses that might not qualify for a more traditional small business loan. To do this, they often use less traditional metrics for underwriting. For instance, one company looks at the number of UPS packages shipped and received.

"They're causing banks to re-evaluate how we do business lending. That innovation and change is good for the industry," says Tunbridge.


  • Nontraditional: If your business is unique, and traditional metrics that banks look for are hard to produce, Fintech can be a great way to access funds.
  • Convenient: Often, you can apply for and access this money digitally. The process can feel streamlined compared to other loan applications.


  • Terms: Many of these loans come with high interest rates or other fine print. Keep a lookout for amortization schedules, prepayment penalties and high premiums. 
  • Less regulation: These companies might not have the same oversight and government compliance programs as more established lenders.

Tips: Read the fine print. Make sure you know the annual rate, the amortization schedule, prepayment penalties and more. These details can help you evaluate whether you can really afford the terms.



Global investment through crowdfunding is expected to reach $96 billion by 2025, according to the World Bank.4 Fundraising is often done via a third–party website, and investors often expect sample products, recognition or equity in exchange for their donation.

While this type of fundraising is used for more than just business ventures, many of the most popular fundraising campaigns have been for new products or businesses.


  • Wide net: Crowdfunding platforms put you in touch with a vast pool of would-be donors. 
  • Lower bar: Donors on a crowdfunding site are unlikely to apply the same scrutiny to your business that a traditional lender would.


  • Regulation and fees: If you use a third–party platform to fundraise, chances are there are fees involved. Plus, these sites aren’t subject to the same regulation as more traditional capital sources. 
  • Idea theft: If you haven’t trademarked your idea, there’s a chance someone with more resources could see it on a public site and steal it.

Tips: Read the fine print to understand what protections and liabilities you have before using these sites. While they can be a great and innovative source of funding, Tunbridge says, "There’s a lot of unknown risk. I would use it as a last resort."


Friends and family

It can be tempting to take money from people you know instead of pursuing more formal channels. But there can be strings attached. Beyond any potential damage to personal relationships, "It gets super complicated on the tax implications and the legal risks," says Tunbridge.


  • Less red tape: Your friends and family are unlikely to run a credit check or ask for revenue projections. 
  • Encouragement: It can be nice to feel like those close to you support you with more than words.


  • Taxes: Gifts above a certain amount are taxable. If the money is viewed as a loan and there is no interest rate charged, the IRS may calculate interest retroactively. 
  • Equity trap: Friends or family may ask for a share of the business, which could potentially limit future funding options.

Tips: Have a frank conversation about terms and expectations before you borrow from friends or family. Be sure to discuss the amount, payment schedule and interest rate, then document what you decide.



Nearly 6 in 10 entrepreneurs use their personal savings to start their businesses.3 If you factor in personal credit cards, home equity loans and other personal funding, that number jumps even higher.


  • Autonomy: You maintain control over strategy and operations. 
  • Motivation: Placing your personal savings on the line might give you added incentive to succeed.


  • Personal risk: If you used your own money, failing could mean personal debt or bankruptcy. 

Tips: Legally registering your business with your state — as an LLC, simple partnership, S Corp or C Corp — can help limit some of your personal liability.

Create bank accounts and credit cards in your business’s name, even if you use personal savings to fund them. “Business lenders look for a credit history for the business itself, in the business’s name,” says Tunbridge.


Next steps

If you’re ready for a small business loan, Tunbridge says there are a few criteria that lenders are sure to look for.

  1. Time in business: Most banks require a business to be at least two years old. 
  2. Credit history: If you use one of the methods of funding discussed here to get off the ground, you can still build a credit history by using those funds to open a bank account and credit card for your business. If your business has no credit history, whether you qualify will be based completely on your personal credit history. 
  3. Performance: Lenders are likely to look at your balance sheet, with a focus on overall profitability. 

For details on obtaining a Small Business Administration loan, read this article.

Learn about U.S. Bank

Related content

10 ways a global custodian can support your growth

Refinancing your practice loans: What to know

What type of loan is right for your business?

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

Evaluating interest rate risk creating risk management strategy

ePOS cash register training tips and tricks

How to make the most of your business loan

5 tips for managing your business cash flow

A simple guide to set up your online ordering restaurant

Tech tools to keep your restaurant operations running smoothly

How Everyday Funding can improve cash flow

4 ways Request for Payments (RfP) changes consumer bill pay

Cashless business pros and cons: Should you make the switch?

Higher education and the cashless society: Latest trends

How to fund your business without using 401(k) savings

Unexpected expenses: 5 small business costs to know and how to finance them

How to identify what technology is needed for your small business

Tools that can streamline staffing and employee management

8 Ways for small business owners to manage their cash flow

How to get started creating your business plan

ABL mythbusters: The truth about asset-based lending

Leverage credit wisely to plug business cash flow gaps

What corporate treasurers need to know about Virtual Account Management

How jumbo loans can help home buyers and your builder business

How to apply for a business credit card

Do you need a business equipment loan?

How to choose the right business savings account

5 questions business owners need to consider before taking out a loan

Meet your business credit card support team

How to establish your business credit score

5 tips to help you land a small business loan

Planning for restaurant startup costs and when to expect them

The moment I knew I’d made it: The Cheesecakery

How to establish your business credit score

What is needed to apply for an SBA loan

Why retail merchandise returns will be a differentiator in 2022

How business owners are managing during the supply chain crisis

Technology strategies to complement your business plan

How to expand your business: Does a new location make sense?

How small businesses are growing sales with online ordering

6 common financial mistakes made by dentists (and how to avoid them)

Business credit card 101

The different types of startup financing

Dear Money Mentor: How do I set and track financial goals?

30-day adulting challenge: Financial wellness tasks to complete in a month

Break free from cash flow management constraints

Evaluating interest rate risk creating risk management strategy

How Everyday Funding can improve cash flow


Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.

1“6 Tips for Borrowing Startup Funds from Friends or Family,” U.S. Small Business Association, September 2016.
2 “Entrepreneurship and the U.S. Economy,” U.S. Dept of Labor, Bureau of Labor Statistics, April 2016.
3 “Top Sources of Business Startup Financing,” Small Biz Daily, July 2016.
4“Crowdfunding in Emerging Markets: Lessons from East African Startups,” World Bank Group, 2015.