Securing funding is often one of the biggest challenges for startups. Whether launching a product, building a service-based business, or expanding operations, having access to capital can make a significant difference in reaching key milestones. There are several ways startups can approach funding, each with its own considerations.
Start with self-funding
Many entrepreneurs begin by using personal savings or assets to fund their businesses. Some also explore using retirement savings through a self-directed IRA or a solo 401(k) loan to access additional capital.
These options can provide flexibility but are subject to IRS rules, including restrictions on personal benefit and certain transactions with disqualified individuals. Understanding these rules is important before using retirement funds to invest in a business.
Explore loans and lines of credit
Traditional small business loans and lines of credit can provide startups with the working capital needed for inventory, marketing, or hiring. Banks, credit unions, and online lenders may all offer loan options tailored to new businesses. Loan approval often depends on factors such as credit history, business plans, and projected revenue.
Startups may also want to explore microloans or specialized loan programs aimed at early-stage businesses or underrepresented entrepreneurs.
Loans from other investors’ retirement accounts
Funding for a new business doesn’t have to come solely from your own retirement account — it’s possible for other investors to use their retirement savings to provide loans to your business. These loans function similarly to using funds from a self-directed IRA, with important restrictions to keep in mind.
Investors who are considered disqualified individuals under IRS rules would not be able to lend money to you or your business. Additionally, any loans provided through retirement accounts must be properly documented, and any repayments — including interest — must be paid directly back into the lender’s retirement account.
In some cases, these loans can be secured by an asset, such as personal property. However, collectibles are not permitted as collateral under IRS regulations.
For a complete list of rules and requirements, visit irs.gov.
Consider angel investors
Angel investors are individuals who provide capital to startups, often in exchange for equity. In addition to funding, some angel investors offer industry experience, mentoring, and valuable business connections. Startups typically seek angel investors when they have a clear product or service concept and some early traction.
Connecting with angel investors may happen through networking events, pitch competitions, or dedicated angel investor groups.
Look into venture capital for high-growth startups
Venture capital (VC) firms invest in startups with strong growth potential, typically in exchange for equity. While VC funding can provide significant capital, it often comes with expectations for rapid growth and a defined exit strategy, such as an acquisition or public offering.
VC funding is usually most accessible to technology companies, innovative product developers, or businesses in high-demand sectors.
Try crowdfunding
Crowdfunding platforms allow startups to raise small amounts of capital from a large number of people. Campaigns typically share a business idea, product prototype, or mission with potential backers who contribute funds to help bring the project to life.
Rewards-based crowdfunding platforms like Kickstarter and Indiegogo are popular for creative projects and consumer products, while equity crowdfunding allows backers to invest in exchange for a small ownership stake.
Explore grants and competitions
Some startups may qualify for business grants offered by government agencies, nonprofit organizations, or corporations. These grants typically target businesses developing innovative technologies, serving underserved communities, or contributing to specific industries.
Business plan competitions and pitch contests may also offer cash prizes or in-kind support, such as free marketing or office space.
Build strong business credit
Establishing and maintaining good business credit can open doors to better financing options. Paying vendors and suppliers on time, separating personal and business finances, and monitoring business credit reports can all contribute to building a strong credit profile.
Funding is just the first step
Securing funding is an important step for startups, but the process doesn’t end once initial financing is in place. Tracking expenses, managing cash flow, and building relationships with lenders and investors can all help startups maintain financial stability as they grow.
For startups owners interested in alternative investment opportunities or business retirement accounts, exploring self-directed IRAs may offer additional flexibility. Learn more about self-directed retirement investing at Equity Trust.
