Nonbank funding sources for small businesses do exist

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Ask a Lender
June 1, 2016 | Updated September 25, 2017


Key Points

Options to consider when you can't get bank financing

  • Home equity or retirement funds are options, but know the risks.
  • For a few businesses, grants are a great option.
  • Investigate state government programs.
  • Venture capitalists have cash, but take a piece of the business.
  • Remember sound business practices when seeking help from relatives.

It's not exactly true that the only way to get a bank loan is to prove to the bank you don't need it, but it can seem that way if you're looking for a loan to fund a new small business. That's been especially true since the recession, as banks and credit unions have tightened their lending standards and have increasingly sought to do business with larger, established companies.

Government-loan programs operated by the U.S. Small Business Administration (SBA) and the U.S. Department of Agriculture support small businesses. For the most part, the federal agencies do not provide money directly, but instead guarantee loans that entrepreneurs must negotiate with bank lenders.

There are other sources of startup money, however, including deep-pocketed venture capitalists, mom-and-pop investors (including mom and pop themselves), government-sponsored bond and grant programs. They are often overlooked sources of funding, but come with unique requirements and risks.

For entrepreneurs who have been turned away by banks, following is a list of some funding sources to consider.

Venture capitalists

Investors who specialize in startups can be an excellent source of funds. There's no debt to pay off and no worries about high interest rates. The drawback is that the investors acquire a piece of the business and, often, some level of control over how it operates. Also, unless your business has a potential for rapid growth (usually in the tech field), venture capital can be even more elusive than a bank loan.


Online sites give entrepreneurs the chance to raise small amounts of capital from large numbers of people. Sometimes contributors get a share of the company, sometimes they get some sort of reward, like presales of a company's product. The U.S. Small Business Administration offers a half-hour video-primer on raising funds for businesses through crowdfunding.

Family and friends

Relying on friends and relatives for cash can be a faster and simpler than dealing with other investors or lending institutions. Of course, things can become awkward if the business goes sour. It's important to be clear about what the money represents. Is it a gift, a loan or an investment in the company? If it's a loan, agree on an interest rate and, whatever the case, put the terms in writing.

Credit cards 

They represent very accessible money, but credit cards also can be an excessively costly source of funds. Interest rates are usually high, and late payments or maxed-out cards can affect your credit rating and ability to fund loans even after your business is past the startup stage.

Home equity

A home-equity line of credit is similar to credit-card financing, but usually at a much lower interest rate. You also can borrow a lump sum against the equity in your home and use the money in your business. Remember, you're taking a risk that could turn bad if the business fails and property values stall and prevent you from rebuilding home equity.

Retirement funds

You can tap into your 401(k), 403(b) or traditional individual retirement accounts without penalties to fund your business under a federal tax-code provision called a Rollover as Business Startup (ROBS). In addition to putting your nest-egg at risk, you will be dealing with plenty of ROBS regulations, so it's a good idea to get professional advice before funding a business with a retirement account.

Private and government grants

The requirements are very specific and the funding is limited, but there are grants — yes, free money — available to small businesses. The federal government compiles a list of government grants available to small businesses.

State assistance

Programs vary widely, but state economic development agencies often offer forms of direct financing to small businesses. For instance, the state of Washington operates a venture fund that invests in early-stage companies, and the quasi-public Connecticut Innovations provides loans and equity financing to startups and other businesses.

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