7 types of startup financing you need to know

Startups are infamous for scaling rapidly by completing multiple rounds of equity fundraising. 

However, that doesn’t mean they can’t benefit from taking on debt. If you’re trying to raise capital for your startup without diluting your ownership, here are some of the best startup financing options to consider.

1. Venture debt

Venture debt is a type of financing for startups that have already secured venture capital support. It’s primarily designed to extend your cash runway between one series funding round and the next without giving up additional equity.

One of the primary advantages of venture debt is that it’s a relatively flexible form of funding, often tailored to your unique needs. However, there are some standard restrictions, including:

• Loan amount: Venture debt is typically limited to a percentage of your most recent equity round, such as 20% to 40%. Alternatively, some lenders may base the limit on your latest valuation, in which case the cap is often around 10%.
• Repayment terms: You typically have to repay venture debt within three to four years. However, you’ll often get to benefit from a temporary interest-only period, such as for the first six months to a year.
• Lender compensation: In addition to charging you interest, venture debt lenders will often require you to provide them stock purchase warrants. These let them purchase company shares at a fixed price until a certain date.

Venture debt usually doesn’t come from the same venture capitalists who have already invested in your company, but from other specialized lenders. However, they’ll often work closely with each investor to leverage their due diligence.

Once you’ve secured the funds, you can usually use them for whatever you need to reach your next equity fundraising round. For example, that might include expanding your sales team, investing in product development, or acquiring new customers.

2. SBA loans

The Small Business Administration (SBA) usually doesn’t provide financing directly, but it does guarantee small business loan accounts at certain institutions. Typically, that includes banks and credit unions, not online lenders.

When a borrower defaults on these term loans, the SBA covers a significant portion of the principal balance. In exchange, the SBA requires the lenders it partners with to comply with certain requirements.

Not only can these requirements make SBA loans a more accessible financing option for some startup founders, but they also tend to result in more favorable loan terms. For example, compared to traditional startup business loans, an SBA loan may provide:

• Lower interest rates
• Higher borrowing limits
• Longer repayment terms

For example, the SBA’s flagship program is its 7(a) loan. It allows you to qualify for a loan of up to $5 million with a maximum repayment term of 60 months. In addition, the interest rate is capped based on your principal amount:

• $50,000 or less: Cannot exceed base rate +6.5%
• $50,001 - $250,000: Cannot exceed base rate +6.0%
• $250,001 - $350,000: Cannot exceed base rate +4.5%
• $350,001 and greater: Cannot exceed base rate +3.0%

In addition, you can use a 7(a) business term loan for many different purposes, including short- and long-term working capital, refinancing existing debt, improving real estate, or acquiring equipment and furniture.

3. Bank lines of credit

A bank line of credit can be one of the most flexible financing tools for startups. Instead of providing a lump sum that you pay back in fixed installments like bank loans, they grant access to a revolving credit account, similar to a large-scale credit card.

When you qualify, the bank gives you a credit limit and an initial draw period. You’ll pay interest on any amounts you borrow as long as they remain outstanding, but you can pay them back at your own pace, then reuse the account repeatedly.

When the draw period ends—usually after several years—the lender stops you from borrowing anything further and has you pay back any outstanding balances.

Like credit cards, you can use lines of credit for a wide range of purposes. However, they’re typically better suited for financing big purchases than day-to-day expenses such as covering payroll, acquiring equipment, or funding marketing campaigns. 

There’s often a fee for each withdrawal, potentially making them costly to use frequently.

Fortunately, bank lines of credit also tend to have much higher credit limits than credit cards. For example, Bank of America’s business lines of credit start at $10,000.

4. Equipment financing

Equipment financing is a type of installment loan designed to help startups and small businesses purchase equipment. The asset you buy serves as collateral for the account, reducing the lender’s risk. 

In other words, you can think of an equipment loan as being the equivalent of a home loan. If you don’t pay your mortgage, the lender can foreclose on your house and resell it to recover their losses. 

Similarly, if you default on your equipment loan, the lender can repossess and resell your equipment.

As a result, this type of startup loan is most beneficial when you need to acquire machinery, computers, or other equipment to launch your business, but you can’t qualify for more flexible financing options, like unsecured loans or lines of credit.

Unlike these other forms of funding, you can’t use equipment financing to cover any operating expenses, but it can at least help you to secure the tools you need to facilitate your business model.

Repayment terms typically align with the useful life of the equipment, often around three to seven years. Other terms vary between lenders, but you’ll likely get more favorable terms on an account from a traditional financial institution, like a traditional bank loan. 

However, equipment financing may be easier to get from an online lender.

5. Invoice financing

Invoice financing involves leveraging your outstanding customer invoices to gain access to startup capital. Instead of waiting weeks or months to collect, you use them as collateral for what’s effectively a short-term business loan.

Typically, the lender advances you a majority of the invoice value, such as 70% to 90%. Once your customer pays the invoice—whether the lender or the borrower collects—the lender releases the remaining invoice value, net of their fees. 

Invoice financing can be useful if you’re struggling to keep up with your ongoing obligations because of slow-paying customers. By accelerating your access to the capital, you can smooth out your monthly cash flow.

In addition, because your advance is effectively guaranteed by your customers’ outstanding invoices, this type of financing is often accessible even to businesses without good credit scores or extensive credit histories.

However, invoice financing tends to cost more than other types of business credit, with fees often ranging from 1% to 5% of your invoice value per month. 

Converted to an annual percentage rate (APR), that usually works out to be more expensive than a typical startup business loan.

6. Business credit cards

Business credit cards are one of the best types of short-term credit, no matter your business model. You can use them to facilitate virtually any day-to-day expense, get around a month of interest-free financing, and usually earn rewards to boot.

For example, Zeni’s AI business credit card generates 1.75% cash back on all purchases with zero fees. It also integrates seamlessly with our AI bookkeeping platform, providing real-time expense categorization that gets smarter over time.

However, you can also use business credit cards as a form of long-term financing through a strategy called credit card stacking. 

It involves opening multiple cards with 0% interest introductory periods of 6–18 months and combining them to assemble a larger pool of interest-free debt capital.

Since business credit cards are relatively easy to qualify for—especially if you have good personal credit—this can be an attractive option for new business owners who might struggle to secure a traditional business loan.

However, it’s important to pay off your balances before the introductory periods end and interest rates start reverting back to normal credit card levels, which can be high.

7. Microloans

Microloans are relatively small loans designed to provide seed funding to those who might struggle to qualify for traditional financing. That can make them a better funding option for a new startup founder or small business owner with limited credit.

For example, the SBA’s microloan program provides loans of up to $50,000 to help small businesses and certain not-for-profit childcare centers grow. The average recipient gets around $13,000.

SBA-approved intermediaries can be one of the best places to find microloans, especially if you’d struggle to get funding elsewhere. These SBA intermediaries are nonprofit community-based organizations that tend to focus on the underserved.

If you get your microloan through the SBA program, you can use the funds to grow your business in various ways, including to purchase:

• Inventory and supplies 
• Furniture and fixtures 
• Machinery and equipment

However, you can’t use them to pay for existing debts or to purchase real estate.

Why financing can be better than equity funding

The primary advantage of financing your startup with debt over equity is that it preserves your ownership. 

Equity financing with a venture capital firm is usually worth it—most startups would love to reach Series B funding or even Series C funding—but overrelying on equity can dilute your shares before you’re ready.

While you have to pay back what you borrow plus financing charges, debt funding also tends to be more affordable than equity funding in the long run. That’s especially true if your business grows significantly after your series fundraising.

In addition, there are many different forms of debt financing for startups, increasing its flexibility. Not only can you use them to facilitate a wide range of purchases, but there are also options for virtually every type of borrower.

Explore startup financing options with Zeni

Fundraising can be one of the most challenging aspects of growing your startup, especially if you don’t have a financial background. If you’d like support, Zeni’s fractional CFOs can provide expert guidance for a fraction of the price of a full-time professional.

Whether you’re structuring SAFE notes, considering equity crowdfunding, or negotiating Series A funding, our team can help you navigate the financial complexities and scale your business through the startup funding stages.

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