5 Small Business Financing Options for Startup Entrepreneurs

small business financing option

Credit Cards

According to a 2012 National Federation of Independent Business (NFIB) study [click the image above for the full infographic], 79% of small business owners used credit cards to start or grow their business. That says a lot about the significance of using credit cards to capitalize a small business.

According to another study (PDF) conducted by Keybridge Research, the use of business credit cards to start or grow a small business has tremendous positive effects on the business and the economy as a whole. The study found that the expansion of credit card lending between 2003 and 2008 contributed to the creation of 1.6 million jobs and for every $1,000 of business credit card use, a $5,500 increase in revenue was experienced by the small business.

The bottom line is that about 4 out of 5 small business owners will be using credit cards.

Founders of Google, Larry Page and Sergey Brin, did it in the early days. Most other successful business owners have done it as well. It’s like anything else in that, you can use credit cards the right way or the wrong way. So plan this like you do your business.

I like what T. Boone Pickens says about planning. He said:

“A plan without action isn’t a plan. It’s a speech.”

Don’t make a speech about using credit cards, make a plan. Places like Lendio and NCH Capital help a lot of business owners learn how to use business credit cards to grow their businesses.


Microloans are small loans typically issued to borrowers who are low income earners or have less than perfect credit and do not qualify for traditional bank financing.

According to the Microfinance Information Exchange, MicroBanking Bulletin Issue #19, nearly 74 million entrepreneurs across the world have microloans that are equal to a combined total of $38 billion U.S. dollars (as of 2009). Statistics vary but most microlenders report that between 95 – 99% of their loans are repaid. Kiva.org has over a 99% repayment rate this month alone.

Repayment rates suggest that small businesses have experienced a significant level of success as a result of obtaining microloans. Furthermore, according to a recent survey (PDF) conducted by Accion U.S. Network, 42% of survey respondents said their business income increased (between 2010 & 2011) as a result of a microloan.

Personal Savings

This is the #1 small business financing option for most people who find that they don’t qualify for credit cards, microloans, or any other type of “traditional bank financing.”

This is a great way to get started.  If you don’t quality for things like business credit cards or traditional bank financing, then you may want to take the appropriate steps to correct any credit issues that may be part of the problem.  We would all like to have more financing options in the future as we grow our businesses.  If you’re like millions of other business owners with less-than-perfect credit, then do something about it.

Resources like Creditera are invaluable as it is currently the only credit monitoring platform that allows business owners to monitor both business and personal credit in one place.

The 3 F’s: Family, Friends and Fools

This is a great example of how the small business funding options are different for everyone. For some people, that list of possible investors from their friends and family is a long one. For others it’s, well, a short list shall we say.

Often times it is difficult to obtain financing from family and friends because they may not fully understand the business or believe it will succeed. You will really need to do what it takes to convince them the business will be lucrative and successful to get them to invest.

Entrepreneurs are famous for over-selling their cool ideas to their Uncle Louie and then seeing things not work out. If you do accept an investment from a friend or family member, then I suggest using something like ZimpleMoney. Whatever you do, be sure to treat your friends and family no different than you would a savvy angel investor. They deserve updates, communication and to be one of the first phone calls when there is a problem.

You should treat them as the partner you allowed them to become when you accepted their check. As for the fools – I’ll leave that one alone.

Retirement Accounts

This small business financing option is highly popular for entrepreneurs who want to purchase a franchise. In order to use your retirement account to fund your business, you would use the Rollover for Business Startup (ROBS) Strategy.

This strategy is slightly complicated so you’ll want to consult with an expert such as Benetrends or Tenet Financial Group.  It consists of forming a C Corporation and rolling your current retirement plan over to the new corporation’s retirement plan. It’s a relatively complex strategy. So don’t try it on your own and do your due-diligence. The term ROBS actually comes from the IRS ROBS compliance project.

ROBs strategies are common but are right up there as the most risky ways to finance a business along with Home Equity Lines of Credit and using personal savings. Again, in the event that your business fails, you likely lose your nest egg or whatever portion of it you “rolled over.”

I probably side with my friend Joel Libava, The Franchise King, on this when I say that I don’t think of franchisees as “full-fledged,” 100% entrepreneurs. I also cannot negate what my other good friend, Rieva Lesonsky, says when she argues, very respectfully, that franchisees take a lot of risk in buying a franchise. Especially a less established franchise.

When franchisees “roll over” their nest egg and start a franchise they totally get my respect and they clearly are taking a risk. I guess for me, I can’t get past the part about following directions and needing to get permission from the franchisor for many business decisions that an entrepreneur would not only make, but would make quickly, and he/she would laugh at the thought of needing someone’s permission.


Successful business owners all have one thing in common. They take action. They execute.

Mistakes and failures come with the territory, so learn your options, move forward, and accept that there will be lessons to learn along your road to success. Figure out which small business financing option is best for you and your dream.


Tom Gazaway Tom Gazaway is Founder and President of LenCred. His expertise is in helping small business owners who are in the first two years of business to properly obtain business financing that separates their personal and business credit while also protecting, preserving, and improving their credit profiles. Tom blogs on the LenCred blog, The Business Finance Lounge.

26 Reactions
  1. great article but your commentary about franchsees seemed nonsequitor. not sure how that fit in with the rest.

  2. graelen, I agree I didn’t do a good job of tieing those comments to the “risk” factor of ROBS financing strategies and who does them. I did almost edit that part out but your non-sequitur comment has merit. I’ll try to do a better job next time. Bottom line is that ROBS strategies are most commonly used by small business owners and less by entrepreneurs as I see it. That conclusion comes from a combination of market data and my opinion on the franchisees as entrepreneurs agrument. Thanks for your comments.

  3. Hi Tom,

    Thanks for the mention.

    I’m 100% okay with folks using a PORTION of their retirement savings to buy a franchise.

    They need to make sure it’s done right, though. The paperwork involved must be perfect. And, several other things need to line up. the right age, enough back-up money, etc.

    I talked about the risks for would-be franchisees here- http://www.thefranchiseking.com/should-you-use-your-401k-to-fund-your-franchise-business

    Great article, Tom…

    The Franchise King®

    • Thanks Joel. It’s great to have you clarify your position on this.

      I think the part I liked the most about your comments was when you said, “make sure it’s done right.” When a franchisee or other type of small business owner works with a qualified representative from a reputable company like the ones I mentioned (or other company that meets those criteria) and uses a ROBS strategy then it can be an excellent way to bring your dream to reality.

      Thanks again Joel.

  4. I guess most startup entrepreneurs always go with the three F’s or with loans. But then again, there are always the safe players who invests their existing savings. I would like to see some unconventional ways to generate some money for startup.

    • Hi Aira, thanks for the comments. The list of unconventional methods could be as basic as a garage sale or as complex as selling an insurance policy (viatical investments). that list could get long and would be interesting, I agree. I’m assuming those lists are out there if you do some searches. I tried to keep to the financing solutions that are more common and most often used. Thanks again Aira.

  5. What about equipment leasing?

    I know, I know. Not many people know about this type of financing option. Based from what you wrote, where does that fall as a financing option?

    • Hey L Rob,
      Equipment financing is a great option. It’s certainly on my list of the 10-12 most common debt financing strategies but for “startups” looking for working capital I guess I’m not sure it belonged on this list. It could certainly be used to preserve working capital but I would probably categorize things like equipment financing and real estate financing differently than the startup working capital options that make the most sense. Let me know if you have a different perspective or if I’m missing something. Thanks for your comment and questions.

      • You’re right, I get what you’re saying and you made a good point there.

        But there are also companies like ours that caters not only to start up businesses but also to established businesses. Those that are expanding their business or needs additional stuff.

        But yes, it might be fall under the options you discussed. Great article btw! I love reading about these tips and sharing them with other people. Hope to read more tips from you!


      • Thanks L Rob. I enjoyed the dialogue.

  6. Since startup, my business partner sometimes fall back on the credit card loans to finance the running of the business, especially when payments are delayed or on the way while money is needed immediately.

    • Diana Tan,
      Thanks for commenting…and join the club. I’ve done the same and statistics would suggest that most small business owners have or are utilizing credit cards in some capacity to run and grow their businesses. Best of luck to you with your business!

  7. Financing your business can be quite a daunting experience if you don’t fully know the options. Some of the above points are some good examples. As one or two may have pointed out already, there are many different paths you can take to attain financing for your business but a good option that you have left out is the merchant cash advance. A merchant cash advance is a small business loan made available to businesses that use card payments and is then paid back from a perecentage of your daily takings. A good option for many SME’s.

    • Thanks for your comments Claire. It was not meant to be an exhaustive list of debt financing options. I’m personally not a big fan of many of the MCA and ACH models although I agree that they definitely have a time and place for some small biz owners. I would say that they are, in some cases (esp when non-recourse), less risky than some of the above options. However, they are also much higher cost. They are definitely on the list if we were talking about the 10-12 most common debt financing options for small biz owners but I’m probably not part of the MCA Raving Fan movement if you know what I mean lol.

      None the less, thanks for reading Claire.

  8. Hey Tom.
    I recently started a company E&R Energy Services LLC. now looking for funding, the company specializes in power washing drilling rigs and equipment also power washing the inside of water trucks and roustabout work, I am currently looking at equipment and property leasing. up until now I have built this company out of my personal pocket. I personally have not so good credit, I am in need of a small business loan $50,000. any ideas how to go about my best approach for getting a loan or just any ideas to get this thing off the ground would be greatly appreciated. the company I work for has close to 2000 water trucks nationwide, between ohio, PA and WV around 200 trucks any ideas?
    Thanks. Jon

  9. A great way for a small to medium sized business to solve their financing and cash-flow problems is to have their invoices factored and get 80 to 90% of the invoices value paid up front. There is however a fee for it, but smart business owners know how to cut the fee in half or more by using their new found cash-flow properly.

  10. Excellent list, however it does neglect to mention the wide variety of government and private support services available to startups, such as BDC’s 2014 Entrepreneur Award, which provides up to $100K in funding to help startups get their business idea off the ground. More information is available here:

  11. Hi Tom,
    Is it world wild? I am from maldives. It’s an Asian country. I am having problem to continue my business.
    Thank you