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For first-time founders without an established track record, securing startup capital is often the first major hurdle. Launching a business can easily require hundreds of thousands of dollars—or even millions—depending on the industry and the founder's ambitions. However, financial experts caution that choosing the wrong funding route can put a company in jeopardy before it even opens its doors.
“The biggest thing that kills a small business, whether it’s an established business, a new business or an acquisition, is lack of capital,” says Mike McGinley, head of small business banking at Live Oak Bank. “You can never have too much capital.”
Given that reality, founders should take time to understand the availability, advantages, and drawbacks of each financing option. Building a realistic funding strategy into the business plan is an essential early step, and it requires knowledge of how the landscape actually works in practice.
Data from the Ewing Marion Kauffman Foundation shows just how reliant new business owners are on their own financial resources. In a 2023 report analyzing startup capital sources among new firms with employees—a group that excludes one-person operations needing little or no funding—the foundation found that 65% of founders used personal savings or cash from family members to launch their ventures.
While that statistic comes from a Kauffman survey conducted in 2017, financial advisers tell Forbes that the pattern still holds true today. Family and personal resources remain the primary springboard for most new businesses, even as other options have grown in popularity.
The gap between personal funding and other sources is substantial. According to the Kauffman survey, the second most common source was traditional bank business loans, used by just 17% of founders. That figure underscores how difficult it can be for new entrepreneurs to secure conventional financing without a proven business history.
Credit cards also play a meaningful role in startup funding. The survey found that 9% of founders relied on personal credit cards to pay for their launches, while 6% used business credit cards. An additional 5% tapped a personal or home equity loan to get their companies off the ground.
Only a small fraction of startups turn to government-backed programs. Just 2% of founders reported using a government-guaranteed loan, such as one from the U.S. Small Business Administration. Experts note, however, that this figure has likely climbed in recent years as SBA loans have become increasingly popular among both new founders and those buying existing businesses.
Venture capital, despite its prominence in business news, plays a minimal role for most startups. The Kauffman survey found that only half of 1% of founders received venture capital funding. A similarly tiny share relied on direct government business loans, a category distinct from SBA-guaranteed lending.
Beyond these common paths, founders may encounter additional financing sources in the marketplace. These include:
Each option carries its own trade-offs between accessibility, cost, and risk. For founders with limited experience, understanding these distinctions before committing to a financing path can make the difference between a sustainable launch and a short-lived venture.
There’s a clear reason why so many founders turn to their own bank accounts or family members before seeking outside capital: it’s typically the most straightforward and affordable funding source available. According to experts, personal savings and family support are the lifeblood of early-stage startups, largely because institutional lenders are often hesitant to back unproven concepts.
Heather Endresen, owner of Viso Business Capital, emphasizes the critical role of personal investment. “It is your savings primarily that gets a small business started in this country. It’s the founder's wealth, personal wealth, personal balance sheet,” she explains. “Just a great idea is not good enough. You've got to have your own money.”
Endresen points out that the reluctance of banks and the SBA to issue substantial loans to first-time entrepreneurs is understandable. A great concept, while necessary, doesn’t substitute for a proven business track record. The hesitation stems from the fundamental risk involved: launching a venture with debt places a founder in a financial deficit from day one. In contrast, using personal capital provides the flexibility and breathing room a new business needs to gain traction without the immediate pressure of repayment.
While securing a loan from a friend or relative is often simpler than qualifying for a bank loan, experts caution against handling it informally. A casual agreement can lead to misunderstandings and strained relationships. To protect both the business and the personal relationship, it’s wise to formalize the arrangement with a written loan document.
This agreement should clearly outline the terms to prevent any confusion, including:
Beyond the personal agreement, founders must also consider the tax implications. It is essential to ensure the IRS classifies the transaction as a genuine loan, not a gift or income, by having proper documentation and charging a reasonable interest rate. This careful documentation protects both parties and keeps the financial arrangement clean and above board.
Securing a traditional bank loan or an SBA loan is a significant milestone for any small business owner, but it is rarely an option for brand-new ventures. The fundamental issue comes down to risk and repayment. As Endresen explains, taking on debt without a proven ability to repay it can actually do more harm than good. “Debt only makes sense when you've got cash flow,” he says. “If I give you debt before you're cashflow positive where you can't pay it back, now you're in default, and I've actually not helped you, I've harmed you. So that's kind of essentially why banks are so tight with debt on young companies.”
This strict approach means that most banks will shy away from lending to a startup that lacks a track record of successful operations. They want to see evidence, typically in the form of a few years of financial statements, that a business can generate enough revenue to cover its loan payments. Without that history, a lender has little assurance that the loan will be repaid.
There are, however, notable exceptions to this rule. Experts point out that founders who have previously run a business, or individuals looking to open a franchise, may find it easier to secure financing. In these cases, there is historical performance data available. Banks and the SBA can examine a founder’s past business ventures or the established performance of a franchise model to determine whether the new loan applicant is a worthwhile risk. This existing data provides a level of confidence that is simply absent when evaluating a first-time entrepreneur with no prior business history.
For founders who do meet the basic eligibility criteria, the application process can still be challenging. The requirements are often described as cumbersome, and the bar for approval is high. One practical piece of advice is to start the search with the bank you already use for your personal banking. Banks prefer to work with people they already know, and a pre-existing relationship can be a significant advantage.
“Bank loans are usually relationship-based,” says Chelsea Mandel, founder and managing director of Ascension Advisory. “A lot of the time they're lending to businesses that they've just been around a long time, either in the community or the market, and they have established financial history.”
Beyond a strong banking relationship, there are several key necessities for landing a loan. For startup founders, your personal credit score is a critical factor. It is advisable to ensure your score is in good shape, ideally above 650, according to McGinley. Lenders will also want to review a solid business plan. This plan should include a detailed financial forecast, and Craig Veurink, senior vice president of business banking at US Bank, notes that it should contain revenue projections for at least two to three years. You will also need to provide personal or business tax returns from recent years, along with a personal financial statement, to give the bank a complete picture of your financial standing.
Founders seeking a loan should also be prepared to contribute their own funds or raise outside equity capital before approaching a lender. Veurink explains that banks generally expect borrowers to have a financial stake in their own venture. “Usually banks want a little bit of skin in the game. They don't want you to borrow the full amount. So you'd want to have some type of injection, generally 15% to 20%” of the requested loan amount, Veurink says. To illustrate, if a founder needs $1 million to launch a company, Veurink advises trying to raise roughly $200,000 in equity before asking a bank to finance the remaining $800,000.
Mandel adds that SBA guaranteed loans are typically easier to qualify for than traditional bank loans, though they usually carry slightly higher interest rates. SBA 7(a) small business loans, which can be issued for up to $5 million, typically come with interest rates of about 13% for loans of $50,000 or less. That rate scales down to approximately 9% for loans exceeding $350,000. SBA loans are also generally structured with a repayment period of up to 10 years.
Conventional bank loans, by contrast, usually carry interest rates ranging from 6.5% to 11%, with a similar repayment timeline of up to a decade. However, they can also be significantly larger than SBA loans. Bank of America, for instance, issues business loans ranging from $25,000 to as much as $100 million.
Despite the lower rates available on conventional loans, Mandel notes that SBA financing remains a critical option for many small business owners. “A lot of the deals we’re seeing recently that have an SBA component are anywhere from 10% to 14% rates. So it’s not typically the first choice, but a lot of times for the businesses we work with, these small business owners, it’s the only choice,” Mandel says.
Credit cards represent another common avenue for funding a business, according to Cathy Callahan, a managing director at Bank of America and business banking executive in the Northeast region. However, she strongly cautions entrepreneurs against using a personal credit card for business expenses. Instead, Callahan advises company founders to obtain a dedicated business credit card as soon as it makes financial sense, provided they have enough capital to responsibly manage this high-cost form of debt.
Callahan emphasizes that securing a business credit card typically requires a track record of operations. It is not necessarily an ideal option for brand-new startups. Rather, it tends to suit more established small business owners who need to cover a short-term budget gap or finance the purchase of new equipment.
“The first access to real capital that we find most people do is credit cards. And they shouldn’t really do it on their personal credit card. They should get business credit cards,” Callahan says. “For most banks, they like to see three years in existence and a three year operating history. And we like it to be basically profitable, or at least on an operational basis, profitable as you’re growing.”
The experts consulted for this article consistently warned against relying on high-interest personal credit cards to fund business operations. Endresen went so far as to label them “traps” for entrepreneurs. The high interest rates and lack of business-specific benefits make them a poor fit for covering company expenses.
Business credit cards offer tangible benefits that extend beyond simple borrowing. Callahan notes that using a business credit card responsibly demonstrates to a bank that an entrepreneur pays their bills on time. Over time, this positive payment history can lead to easier approvals for business loans in the future, smoothing the path for further growth.
“Wrapping it into the whole relationship gives you a lot of other benefits. We give you cash back. We give you rewards on those credit cards,” Callahan says. “And then that starts to build more equity for the company.”
This relationship-building approach can also pay off in the form of lower borrowing costs down the line. Once a business has demonstrated several years of profitability and a solid operating history, it may qualify for more favorable financing terms. As Callahan explains, “When the client is ready for a bank, because now they’ve demonstrated three to five years of history, they’re now profitable, they fit our profile, we can take them out of the private lender and significantly reduce their borrowing costs.”
Launching a business under a recognized franchise brand can open financial doors that remain closed to entirely new ventures. According to Matthias Smith, founder of Pioneer Capital Advisory, new franchisees often have a distinct edge when seeking capital. Banks and SBA lenders may be more willing to approve loans for franchise locations because they can examine the historical performance of other outlets operating under the same parent company. This track record serves as a powerful indicator of how a new location might perform.
Smith explains the lender’s perspective: “Really the bank is trying to size up, how realistic is it that this business will be successful based on the business plan, based on the market, and based on who the operator is going to be? And if it's a franchise brand, is there any historical data that they can point to as evidence that there likely will be success versus failure?” The availability of this historical data can often be the decisive factor in whether a loan is approved or denied.
Beyond improving approval odds, franchise founders may also enjoy more favorable loan terms. Smith notes that it is not uncommon for banks to offer an interest-only payment period on new business loans for franchisees. This arrangement provides greater flexibility by allowing the borrower to delay paying down the principal until the business begins generating steady revenue.
For founders pursuing a completely original business concept, the lending landscape is considerably more challenging. Smith cautioned that a traditional bank loan for a pure startup is frequently only possible when the founder can offer substantial collateral, such as a home or a valuable automobile. The core issue is that banks prefer to underwrite loans based on established cash flow.
“Startups by and large typically are just harder to get traditional bank financing for, because banks really like to underwrite and lend off historical cash flows,” Smith says.
For those who own property, a home equity loan presents a compelling alternative. US Bank’s Veurink highlights this option as a quick source of capital for new business owners. “It’s cheaper, it’s easier, you don’t have to give any big plans” to a bank for approval, Veurink says. This route allows founders to bypass the extensive business plan presentations typically required for commercial loans. “They don’t need to show everybody what they’re going to do… That’s another thing that happens a lot.”
Beyond banks and home equity, Veurink points to a wide array of resources available to aspiring entrepreneurs. These include regional and municipal SBA offices staffed with advisors ready to offer guidance. Nonprofit organizations, such as SCORE, provide free business advice and mentorship, while some may even offer lending programs. Trade associations can also be valuable sources of technical assistance and funding direction.
Additionally, many major financial institutions operate dedicated business resource centers. Examples include Bank of America’s Center for Business Empowerment and JPMorganChase’s Digital Hub for Small Businesses. These centers are designed to help launch and support new small businesses across the United States, providing educational materials and expert advice to help founders succeed.
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