What Is the Most Common Source of Funding for Entrepreneurs?

You have a great idea and are convinced it will translate into a prosperous business. But how can you turn your brilliant idea into reality? It can take a significant amount of cash to start a new company, and even if you have savings, it might not be wise to invest everything you own into a startup company. 

Fortunately, there are plenty of start-up business funding options for aspiring entrepreneurs that you can explore when you enroll in a Bachelor of Science in Entrepreneurial Studies degree program. What is the most common source of funding for entrepreneurs? According to a 2023 survey by Forbes Advisor, taking out business loans ranked first, followed by borrowing from friends and family and then using personal savings.¹

It’s important to note, however, that the most popular method of funding a business idea isn’t necessarily the one that’s right for you. Take a closer look at all the possible sources of funding to determine which one — or what combination of methods — will work best for your needs.

In This Article:

• Bootstrapping
• How To Get Funding To Start a Business: Equity Financing
• Debt Financing
• Examine Start-Up Business Funding at GCU

Bootstrapping

Not all businesses require considerable start-up capital. In fact, many businesses don’t even require premises, as they can be operated entirely online with a digital storefront. Bootstrapping entrepreneurs are those who cover their start-up costs entirely with their own money or, better yet, get their customers to pay upfront. Bootstrapping requires carefully watching every expense and getting creative to make ends meet while the business gets off the ground.

How To Get Funding To Start a Business: Equity Financing

Although it’s sometimes possible for entrepreneurs to rely entirely on their personal savings plus some creative cost-saving measures to fund their start-ups, many entrepreneurs do need external funding sources. Let’s take a look at how to get funding to start a business. 

The first method is through equity financing, which involves selling shares of the business — or equity — to investors, who will then become partial owners of the company. There are a few examples of equity financing, such as the use of angel investors and venture capitalists.

Crowdfunding for Start-Up Business Funding

Crowdfunding is a relative newcomer to the start-up scene. It is one of the fastest ways to cast a big net for attracting investors to a business. Two popular websites for crowdfunding are Crowdfundr and Kickstarter, but there are many other alternative options you can consider as well.

A crowd-funded business receives small amounts of cash from hundreds or thousands of individuals to get an idea off the ground. In order to convince people to invest in your startup, you’ll need to have a compelling story and a truly unique idea that people will believe to be financially viable.

Angel Investors

An angel investor is an individual, not a financial institution. These are also referred to as private investors or seed investors. Angel investors aren’t venture capitalists because they typically use their own money to fund businesses that they believe can become prosperous.

Since angel investors are taking on considerable risk to fund a new business, they want to be sure that the company will succeed. Therefore angel investors often serve as business mentors, providing valuable guidance, expertise and professional connections to the entrepreneurs.

Venture Capital

Venture capitalists are individuals or firms that look for high-potential start-ups with rapid growth prospects to invest in. In exchange for investing what is usually a significant amount of money, venture capitalists expect a substantial ownership share of the business. In addition, they are typically very hands-on in the day-to-day operations of the business because they want to protect their investment by encouraging business success.

Debt Financing

In contrast to equity financing, debt financing involves taking on debt to fund a business, rather than attracting investors by selling them shares of ownership. Whereas investors have a claim on the potential future earnings of the company, creditors expect to be paid back in full plus interest for their investment loan. If the company is not successful and goes bankrupt, then the creditors have a claim to the liquidated assets.

Banks and Commercial Lenders

A private lender is a financial institution like a bank or credit union. Many businesses that have strong personal credit and collateral can apply for a commercial loan with the intent to grow their business, such as by opening new locations or investing in new equipment.

Plan to take your time shopping around for the best rates. Credit unions typically offer more favorable rates, but they only lend to members. Additionally, private lenders will want to see a comprehensive business plan before making a loan offer. Make sure you understand all the terms and conditions of the loan before you sign on the dotted line.

Government Grants and Loans

Federal and state government agencies consider it to be in the best interests of the economy to help aspiring entrepreneurs hang out their proverbial shingles. This is why some businesses get funded with government grants or loans. 

You may have a better chance of getting funding this way if your business will create jobs or if your company will be located in an economically-depressed area in need of revitalization. Some grants and loans are intended for specific industries, like STEM fields. The Arizona Innovation Challenge is a current example awarding hundreds of thousands of dollars each year.²

Friends and Family as a Source of Funding

If you’re finding it challenging to convince investors or banks of the quality of your idea, your family and friends may be more likely to believe in your dream and may lend you money at a low interest rate or even no interest rate. Approach friends and family with caution and only after you have bootstrapped and tried other sources of funding.

If you do go to friends and family for loans, it’s a good idea to make sure that each of you gets sound legal and financial advice. Don’t take their life savings; explain the extreme risk associated with start-ups. You don’t have a proven business — you have an experiment! Be honest and transparent about the fact that they could lose all their investment. Be careful if you decide to proceed this way, as there is the potential for harm to personal relationships.

Bonds

A bond is a financial instrument that indicates an investor has made a loan to the borrower. You may have heard of government bonds; it’s also possible for private corporations to issue bonds to raise funds. The bond specifies the details of the loan, such as the interest rate and the date(s) of payment.

Examine Start-Up Business Funding at GCU

The Colangelo College of Business at Grand Canyon University strives to graduate students who are ethically minded leaders determined to make a positive difference in their communities. If owning your own company is in your future, consider earning your Bachelor of Science in Entrepreneurial Studies degree with the support of our learning community. Fill out the form on this page to get started.