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Despite obstacles including inflation, high-interest rates and stricter lending standards, entrepreneurs are still securing financing and forming businesses. In the first half of 2023, 2.6 million new businesses were registered in America, a slight increase from the same period in 2022.
When a venture needs funding to grow, borrowing money is one way to raise capital. Yet, this path may involve financial drawbacks, like high debt payments and losing money to interest.
To find how entrepreneurs funded their ventures and how that funding was used, Forbes Advisor surveyed 750 business owners.
Key Takeaways
- Business loans were the most popular business funding method, with 27% of entrepreneurs surveyed using them as their primary financing source.
- The second most popular method of funding was borrowing from family friends, an option used by 20% of entrepreneurs. Another 17% used personal savings.
- Sixty-five percent of entrepreneurs said more access to capital was an advantage of their chosen financing method.
- About 30% of borrowers said the biggest pitfall of borrowing was managing debt repayments. Another 22% said the biggest drawback of their financing method was funding limitations and 21% said high interest rates or fees.
- A little over half of entrepreneurs said they used funding to pay for rent or monthly recurring utility costs. Meanwhile, 45% spent the funding to set up a website or physical store and 42% used funds to cover inventory.
- Three in four entrepreneurs anticipated that paying off their initial funding would take more than four years.
Most Common Methods of Business Financing
Business loans were the most common financing method for businesses, the 2023 survey by Forbes Advisor found. Loans from friends and family were the second most popular funding method, with one in five entrepreneurs surveyed opting for this funding method.
Using personal savings, which business owners used to avoid debt payments and interest, was the third most popular way to fund a business.
Credit cards were the least common funding method—just 8.4% of entrepreneurs surveyed used this method. Sixty-six percent of entrepreneurs refrained from using credit cards for fear of damaging their credit score, while 61% avoided credit cards because they needed a higher credit line and 45% wanted to avoid high interest rates.
The cost of credit has soared over the last few years after multiple Fed Fund rate hikes, making credit card borrowing more expensive and likely less appealing.
From August 2021 to August 2023, commercial credit card interest rates saw a 46% increase, moving from 14.54% to 21.19%. Some experts predict the Fed may start cutting rates in the second half of 2024, which could mean more competitive credit card interest rates are on the horizon.
Why Do Entrepreneurs Choose Certain Methods of Funding?
How an entrepreneur decides to fund their business—whether through borrowing or drawing from savings—depends on several factors.
Among business loan recipients, 46% opted for loans due to the flexible repayment timeline. For 42% of entrepreneurs who borrowed money from family and friends and 39% who used personal credit cards, repayment flexibility was why those chose their funding method.
Even with flexible terms, depending on loans and credit cards meant business owners had to go into debt to fund their ventures. For that reason, 46% of entrepreneurs drew from personal savings and avoided financing to launch their businesses.
How Much Funding Do Entrepreneurs Use To Start a Business?
Among all funding methods, $25,001 to $55,000 was the most commonly reported funding amount used to start a business. Thirty-seven percent of entrepreneurs who chose business loans and 21% who drew from personal savings relied on this amount to fund their venture.
Entrepreneurs who had a personal network to tap into for capital tended to secure larger funding amounts. Twenty-seven percent of those who borrowed from friends and family relied on between $55,001 to $85,000.
How Are Startup Funds Primarily Used?
Starting a business can come with many startup expenses, from licensing fees to production and marketing costs. Despite the popularity of online shopping and online storefronts, many entrepreneurs run brick-and-mortar operations.
Among all surveyed entrepreneurs, 52% percent used funding to pay rent or monthly recurring utility costs. Another 45% used their resources to set up a website or physical store and 42% used funding to cover inventory.
For entrepreneurs who chose a business loan, inventory accounted for the biggest allocation of funds. On the other hand, 59% percent of entrepreneurs who borrowed from someone they know and 71% who drew from personal savings allocated the bulk of their funding towards setting up a website or a physical store.
Entrepreneurs Anticipate Taking Over Four Years To Repay Debt
The majority of entrepreneurs—75%—anticipated that it would take more than four years to pay off their initial funding. Thirty-three percent said their debt payoff term was four to six years, the most common response.
In particular, the four- to six-year repayment time frame is most common among entrepreneurs who utilized business loans or sourced funding from friends and family. Only 3.5% of all entrepreneurs anticipated paying off their payment method in less than a year.
Entrepreneurs Experienced Different Challenges Based on Funding Methods
Like all financial decisions, borrowing money for a business venture can come with different challenges and advantages. Asked about the benefits of their chosen business financing method, 65% of all respondents cited that it helped them access more capital.
Thirty-two percent said their financing method offered a quick lending process, and another 32% said their chosen method offered affordable repayments.
Seventy-three percent of entrepreneurs who opted for business loans found increased capital availability to be the biggest advantage. Availability of financing was the biggest benefit for the 60% who utilized savings and the 72% who borrowed from friends and family.
The chosen funding methods also came with disadvantages. For 30% of those surveyed, managing debt repayment posed a major challenge. Just over one in five entrepreneurs also cited funding limitations and high interest rates or fees as areas of concern.
Although the majority of entrepreneurs who used business loans found increased capital availability as an advantage, 33% did not. These borrowers reported that funding limitations were a drawback of using business loans, along with difficulty managing debt repayments.
How To Find the Best Small Business Finance Products
For entrepreneurs looking to finance a business venture, the best way to borrow money depends on the business’s needs, goals, revenue and creditworthiness. These steps can help you find the best option for your business.
1. Review Small Business Financing Options
Many types of business financing products exist with different payment structures. Comparing options against each other can help entrepreneurs pinpoint what products will best fill their financial gap. Here are a few types of business financing to consider:
- Term loans: A cash lump sum repaid in installments, with payments often due weekly, biweekly or monthly. Terms for loans generally cap at 10 years; however, terms for bank loans and SBA loans may reach 25 years.
- Startup loans and microloans: Smaller installment loans of up to $50,000 for newly established or growing businesses. Eligibility criteria for startup loans and microloans may be more flexible than larger business loans.
- Business lines of credit: A credit line with a limit that can be drawn from and repaid as needed. Business lines of credit can range from $5,000 to $250,000 or more, depending on the business’s credit and revenue.
- Business credit cards: A credit line linked to a credit card that business owners can use for business purchases or to draw cash from (for a fee) on an ongoing basis.
- Merchant cash advances: An agreement where a third-party company gives your business a cash advance against future sales. Merchant cash advances are repaid through a percentage of card purchases until the balance is repaid.
- Invoice factoring: For businesses that invoice clients, this is the process of selling unpaid invoices to a third party to get a percentage of the invoices up front. The invoice factoring company collects invoice payments from your clients and then pays you a portion of the collected funds minus a financing fee.
2. Understand Eligibility Requirements
Eligibility requirements for business financing can vary, with some options being easier to qualify for than others. Here’s an overview of common factors lenders consider when approving borrowers for financing:
- Time in business. Lenders may require at least two years in business for certain financing, but requirements can vary. Microloans and startup loans are geared toward newer businesses. Online lenders may also approve businesses for financing with a year or less of business history.
- Credit. The best interest rates on financing are typically offered to borrowers with credit in the mid-600s or higher. However, some alternative lenders may offer loans to borrowers with lower credit scores and limited business credit history.
- Revenue. Lenders check revenue to ensure businesses have a source of money to repay the loan. The revenue requirement can vary by lender, but $100,000 is a common minimum to qualify for a business loan.
- Down payment. Although some business financing options don’t require a down payment, some loans could require a down payment of at least 10%.
- Collateral. For large credit lines and business loans, you may need to pledge collateral like property or equipment to back the loan. This collateral reduces risk for the lender by tying something of value to the debt. If a business owner defaults on the loan or credit line, the lender can take possession of the collateral.
If a new business idea doesn’t yet meet the criteria for business financing, entrepreneurs could consider using a personal loan (as long as the lender permits using funds for business purposes) or credit card to fund the project. In this case, lenders will only review the borrower’s credit and income. The borrower—and not the business—is also solely liable for repayment.
3. Compare Financing Costs and Payments
The cost of business financing can vary widely depending on the lender, the chosen method of financing and the business’s creditworthiness. To find the lowest cost option, compare interest and fees from multiple lenders before signing a financing contract.
In addition to comparing interest rates, business owners should watch out for one-time fees and ongoing borrowing fees to estimate short- and long-term costs. Asking questions and negotiating interest rates, fees and repayment terms is the best way for borrowers to customize a product to fit their needs and budget.
Related: How To Get A Business Loan
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Methodology
This online survey of 750 business owners was commissioned by Forbes and conducted by market research company OnePoll, in accordance with the Market Research Society’s code of conduct. Data was collected from July 26 to Aug. 7, 2023.The margin of error is +/- 3.6 points with 95% confidence. This survey was overseen by the OnePoll research team, which is a member of the MRS and has corporate membership with the American Association for Public Opinion Research (AAPOR).
