How to Fund Your Startup Without Seed Investors: Loan Options Explained

Starting a new business is an exciting and rewarding chapter in your life. But figuring out how to pay for getting your launch is another challenge altogether.

If you’re an entrepreneur leading an early-stage startup, you may be coming across terms like business seed funding, venture capital, and angel investors. While some startup founders do look to these sources to fund their businesses, many want to avoid them altogether to retain full ownership of their company.

Thankfully, there are other ways besides business seed funding to start your new business, including SBA seed funding, microloans, and online lenders.

This article explains business seed funding and explores small business loan options to help you determine which type of funding is best for your business.

What is Business Seed Funding?

Business seed funding, also known as seed capital, is a type of equity financing. It’s often the first money a startup raises to help grow its business. It usually happens during the seed stage, which is during the early stage of a startup when a company is just getting off the ground.

Before the seed stage, some founders raise pre-seed funding, which often comes from their own savings, family and friends, or angel investors. An angel investor is typically a high-net-worth person who uses their personal funds to invest in a startup in exchange for some of the equity in the business.

After the seed round, startups may seek Series A funding, which can help scale the business after proving initial success. Each business seed funding stage reflects the startup’s growth progress and different investment needs.

A startup can use business seed funding for several purposes, including:

• Conducting market research to validate the need for the startup’s products or services
• Product development or developing a prototype
• Hiring early team members and employees
• Setting up the business’s operations

Pros and Cons of Equity-Based Startup Funding

Business seed funding can reduce the early financial stress associated with a new business. You can also get mentorship and support from investors, who often have run their own successful businesses and can bring significant experience and a network of connections to contribute to your startup’s success.

Although business seed funding can accelerate your startup’s growth, it’s not without risks. The biggest risk is giving up full control of the business to investors in exchange for capital. There’s also the challenge of determining an early-stage startup’s valuation. As a founder, you also risk more dilution of your company with each investor in your business.

Another downside is that business seed funding with outside investors can prolong the time it takes to receive your startup funds. This is because investors don’t go into a new venture blindly. They perform their due diligence to ensure a startup idea is viable and likely to succeed.

The Benefits of Loan-Based Options for Start-Up Business Funding

Rather than giving up equity with business seed funding, many business owners use bank or alternate lender financing.

Unlike seed investors who take a portion of the company in exchange for money, a small business loan allows you to maintain 100% control. This means several things. First, all future profits and decisions stay with you, the owner of your business. So, if an opportunity that's too good to pass up comes along in the future, you don't have to worry about an investor pulling the plug.

The loan application process is also easier and, on the whole, faster than trying to convince potential investors. Many lenders will focus on your company's ability to repay the money, rather than digging deeply into business ownership, market potential, or long-term equity. This can be helpful for early-stage companies that already have some revenue or a strong business plan.

Compared to seed investments from angel investors and venture capital firms, loans have fewer strings attached. There’s usually no need to give investors a say in business decisions, sit on a board, or meet certain growth demands.

Business Funding Options That Let You Keep Your Equity

There are several different types of start-up funding for your business, especially when you want to avoid giving up equity with your business seed funding. Each has its own advantages to fit your business needs.

1. SBA Loans and SBA Seed Funding

The Small Business Administration (SBA) is a U.S. government agency that helps small businesses obtain loans by guaranteeing part of the money borrowed. This makes SBA-approved lenders and banks more willing to take a chance on loaning money to new or small businesses.

SBA loans aren’t equity-based like seed fundraising, but many entrepreneurs think of them as seed funding when looking for early-stage capital.

There are several SBA loan programs, but the most common is the 7(a) loan, which offers up to $5 million for general business use. SBA Express loans are faster to apply for and receive funds for, but have smaller limits. SBA Microloans are a popular option for startups and offer up to $50,000.

SBA loans have lower interest rates and longer repayment terms than other types of small business loans. To qualify, you’ll usually need a strong business plan, a good credit history, and sometimes collateral.

2. Business Lines of Credit

A line of credit can give your startup flexible access to money, which can be used as needed. A lender will grant a maximum credit line to draw from, and you only have to pay interest on the amount used. As you repay the portion of the line of credit used, it’s added back to the limit.

Business lines of credit can help cover short-term costs, like inventory, emergency business expenses, or managing cash flow. It can provide a necessary capital resource as you wait for a funding round to close or as you build your business with financing options that don’t require you to give up equity.

You can apply for a business line of credit from banks, credit unions, SBA lenders, and online loan platforms.

3. Equipment Financing

Equipment financing can help your startup get the tools, equipment, or machinery it needs to operate. An equipment loan can even be used to purchase a company vehicle. A prime advantage is that the equipment purchased with the loan funds acts as collateral.

Equipment loans work especially well for businesses in the following industries:

• Healthcare
• Technology
• Manufacturing
• Restaurant and Hospitality
• Construction
• Retail
• Landscaping
• Fitness Centers and Gyms

You can apply for an equipment loan through almost any lender, including banks, the SBA, and online lenders.

4. Online Business Lenders and Loan Platforms

An online loan platform or Fintech uses data and technology to offer faster funding to startups. The application process is simpler compared to banks, and you can often be approved quickly.

Online loans are helpful when your business needs fast funding for an important goal, such as launching a product, buying inventory, or expanding services to reach new customers. While not always ideal for long-term use, they’re helpful for startups that need a quick boost and want to avoid delays in funding or equity loss tied to business seed funding.

How to Build a Fundable Business Without Giving Up Equity

Whether you decide to pitch your business idea to investors for business seed funding or apply for a business loan with lenders, you’ll need to prepare ahead of time to increase your chances of successful funding.

Here are some things you can do to make your startup funding pitch more convincing to lenders.

• Create a strong business plan: It can’t be overstated how important it is to take the time to formulate a winning business plan. It could be the differentiator for helping you get funding, whether you’re getting a loan from lenders or looking for potential investors for business seed funding.

Your business plan should:

• Introduce your founding team and explain how their experience and knowledge in the industry will contribute to your business’s success. Your founding team includes you and any key employees.
• Explain your business and outline what your company does.
• Show that you’ve done market research and understand your industry and ideal customers. Your research should highlight a product-market fit between your business and potential consumers. It should also include data about your market and its competitors.
• Illustrate your short and long-term goals and explain what you envision for your business’s future.
• Have a financial plan and a business model that shows how you plan to make money. Include financial projections, including expected expenses and income. You’ll also need to find out which financial statements your lender wants to view. This can include anything from income statements to business and personal bank accounts, and tax returns.
• State the amount of money you need to finance and how you plan to use it.

• Build a prototype or minimum viable product (MVP): If you’re launching a new product, business seed funding investors are more likely to want to see a prototype or MVP. This can be a sketch, or an actual model of your product, and a demonstration of how it works.

Some things to keep in mind about your prototype or MVP before trying to secure business seed funding are:

• Test your product with real users and collect feedback on what they like or don’t like about your product. Then improve your product based on the feedback.
• Show that your idea resonates with consumers. Track how many people have expressed an interest in using it or are already using it.
• Show early results such as reviews, sales, or sign-ups.
• Consider using a pitch deck to visually convey your idea and look more professional.

Note that some of these ideas can also apply to service-based businesses instead of products.

• Check your creditworthiness: A good credit history can be essential when securing funding with a lender, particularly during the early phase of your startup. Find out what your credit score is and take steps to improve it, whenever possible.

Some things you can do to strengthen your credit profile are:

• Consolidate or refinance debt to allow for easier repayment of your startup loan.
• Pay off any balances whenever possible.
• Pay bills on time and establish trade lines with vendors to build your business credit.

The Takeaway: Business Seed Funding or Loan-Based Start-Up Funding?

The best funding path for your startup is one that fits your vision and business needs. Not every startup has to raise capital through angel investment or venture capitalists. While business seed funding can help some businesses grow fast, it often means losing equity and control.

Loan-based funding could be a better path that allows you to keep full ownership and build your company on your own terms.

Choosing the right type of funding depends on your business goals, how fast you plan to grow, and how much risk you’re willing to take. Think carefully about where your startup is now and where you want it to go. Then, take the steps needed to fund your venture.

FAQs About Business Seed Funding

1. Do I have to pay back business seed funding?

If you get your seed money from an angel investor or venture capitalist, you don’t pay back the money because it’s given in exchange for equity in your business. Investors become shareholders of sorts in your startup. That also means they share in the profits. To keep all control in your business and your return on investment (ROI) in your pocket, get a business loan instead.

2. What is business seed money?

Seed money in business is the initial funding a startup gets to launch a new company. It’s the funding that helps entrepreneurs take their business idea from a concept to a full-fledged business that brings in revenue.

3. Do all entrepreneurs get seed funding for startups?

It’s estimated that less than 10% of entrepreneurs secure business seed funding.

4. How is an SBA loan different than SBA seed funding?

Technically, they’re not the same thing. Entrepreneurs often refer to them in the same way and use SBA loans, particularly microloans, as early-stage capital. But the big difference is you don’t have to give up any equity with an SBA loan like you do with business seed funding.

5. Can I get start-up business funding if my business is brand new?

While it can be more challenging for new businesses to qualify for startup funding, SBA microloans and equipment loans may be easier to qualify for than business seed financing. Online lenders also work with entrepreneurs who need start up business funding.

Frequent searches leading to this page