Entrepreneurs typically start their businesses with savings they have collected or by getting friends and family to contribute to their startup costs. However, this may not be an option for everyone. What can you do then?

The first thing you'd probably do is apply for a bank loan. A brand new business may have a difficult time getting a small business loan from a bank. In general, traditional lenders typically require businesses to be in business for at least two years, with steady or growing revenues during that time. Having good credit scores (personal and/or business) is often a requirement as well. You may have trouble getting lenders to give your startup a chance if you don't have a history of sales.

There are some banks and credit unions that finance startups and some even offer SBA loans to new businesses. Generally, when they do make those loans, they go to founders who are already well-versed in business or have extensive experience in their specific field (such as a veterinarian opening a new practice).

Here are five financing options for novice entrepreneurs to consider when looking for startup capital:

1. Using a credit card

Credit cards are one of the most popular sources of capital for young businesses, after personal savings, friends, and family. But why? Most card issuers (even those that issue small business credit cards) consider income from all sources (not just business income) and make decisions largely based on that income as well as the owner's personal credit score.

It is best to apply for a small business credit card while you still have a day job providing income that you can list on the application. If you're already self-employed, you may list other sources of income to cover the debt, such as income from a spouse or partner who will pay your bills if your business can't.

A few credit cards with generous credit limits can rival the amount of financing you can get from a bank line of credit. If you plan to carry a balance, keep an eye on interest rates and take advantage of low-rate offers. Also, watch your spending like a hawk to avoid getting into debt you can't repay.

2. Getting Credit for Trade

A serious entrepreneur should consider getting credit from suppliers and vendors. The ability to get credit on net terms, such as net 30 (meaning payment is due 30 days after the invoice date), can improve cash flow as well as build business credit.

Vendors that report to business credit agencies can boost your business credit rating. Most vendors don't charge interest, but you may sacrifice a discount if you pay in cash promptly.

3. Renting Equipment

When you're getting started, don't assume you'll have to shell out cash for the equipment your business will need. It may be possible to lease it instead. Leasing is possible for everything from computer equipment to trucks.

Some of the most popular lease types are:

  • An operating lease (or "fair market" lease), in which you lease the item for a specified period and then either buy it for its fair market value, upgrade to new equipment or return it.
  • You own the equipment but make payments for the term of the lease when you enter a capital lease (or "$1 buyout" lease). It can be bought for a nominal sum, usually $1, at the end of the lease. There may be tax benefits associated with this type of leasing, so talk to your accountant about it.

Leases are offered by some equipment sellers, or they partner with companies who offer them. In other cases, you will work with a broker to find the best lease for your situation and qualifications.

4. Fundraising

Through an online platform, you can raise money from both people you know and strangers.

The four main types of crowdfunding are:

  • Rewards: If you're selling a product or service, you can entice people by offering them an early version of your product or another reward (such as merch).
  • Equity: Sell shares in your company to raise up to $1.07 million through Regulation Crowdfunding. There are also convertible notes and debt offerings.
  • Debt: Borrowing money you will repay. You may need to use Regulation Crowdfunding for larger loans. Alternatively, if you just need a small amount to start, consider a platform like Kiva, where you can raise up to $15,000 at zero percent interest. After you get your initial backers, your campaign will be visible to 1.6 million lenders who lend through this non-profit because they want to help small businesses succeed.
  • Donor: This fundraising method, popularised by GoFundMe, involves getting contributions from individuals who do not expect to be reimbursed. Despite its popularity as a source of startup funding during the pandemic, donor-based crowdfunding hasn't helped many businesses. You may consider donor crowdfunding if you have a compelling case for doing so, however.

Whatever type of crowdfunding you choose, you'll need to get your campaign started by asking friends and family to pitch in. If you want to reach potential backers, you'll need a way to do it, whether it's by email or social media. An effective marketing campaign is essential. Check out this SCORE.org webinar about crowdfunding.

5. Retirement Funding

In order to start a business, you can withdraw funds from retirement accounts, but you should find out whether you will have to pay taxes on that money and whether you will be penalized for early withdrawals.

The Rollover for Business Startup (ROBS) is another option. These programs allow you to use retirement funds in a specific way to fund startup business costs. Businesses that are capital intensive or high-risk and cannot secure other financing have a tendency to use it. You must be aware, however, that the IRS has very specific rules for people who use these plans, and if you run afoul of them, you could face taxes and penalties.