The sources of funds for a business fall into three broad pools: money the business generates on its own, money borrowed from lenders, and money raised by selling ownership stakes to investors. Most companies draw from all three over their life. Which mix fits you depends on what the money is for, how long you need it, and how much control and future profit you’re willing to trade away to get it.
Money the Business Generates Itself
Internal funding is the cheapest capital you’ll ever have. Nobody charges interest on it, nobody takes collateral against it, and nobody gets a vote in exchange for it. The ceiling is just how much cash the business actually produces.
Retained Earnings
Retained earnings are accumulated profits that haven’t been paid out as dividends or distributions. A company that earns $2 million after taxes and distributes $500,000 keeps $1.5 million on the balance sheet to reinvest. Over several years, that pool can fund significant growth without ever calling a banker or a broker. The board decides each period how much to retain versus distribute, and that single choice shapes how quickly the business can expand on its own power.
The limit is arithmetic. If you need $10 million for a new facility and generate $3 million a year in free cash flow, retained earnings alone mean waiting several years, with the lost revenue and competitive ground that implies.
Depreciation and Amortization
Depreciation and amortization reduce taxable income without the business writing a check. Buy a $500,000 piece of equipment and depreciate it over five years, and you record $100,000 in annual expense while the cash stays in the company. The resulting tax savings add further to reinvestable cash. This is why capital-intensive industries like manufacturing and utilities throw off meaningful internal cash flow even in flat-revenue years.
Working Capital
Cash sitting in unpaid customer invoices or excess inventory is capital you could be using somewhere else. Tightening collections, negotiating longer terms with suppliers, or running leaner inventory frees cash without borrowing a dollar. A business that cuts its average collection period from 60 days to 40 days on $10 million in annual sales unlocks over $500,000 in working capital. The gains aren’t one-time, but there’s a ceiling on how hard you can push customers and suppliers before relationships suffer.
Sale-Leasebacks
A sale-leaseback converts an owned asset into cash while keeping it in use. The company sells the property or equipment, collects the proceeds, and leases the same asset back. It’s common with commercial real estate: a business might own a warehouse worth $5 million but need that equity for growth more than it needs to own the building. The cost is a recurring lease obligation and the loss of any future appreciation.
Borrowed Money
Debt means you’re legally obligated to repay with interest. The lender has no ownership and no claim on profits beyond the agreed interest. You keep control; the trade is that debt service is a fixed obligation whether business is good or bad.
Bank Loans and Lines of Credit
The two most common bank products work very differently. A term loan is a lump sum repaid on a fixed schedule, and it fits defined purchases like equipment or real estate. A revolving line of credit sets a borrowing ceiling you can draw against and repay repeatedly, paying interest only on the outstanding balance. Lines handle cash flow gaps, seasonal inventory builds, and other short-term needs where the amount fluctuates.
Banks usually secure these loans against business assets and often add financial covenants requiring the borrower to maintain specific ratios, such as a minimum level of equity relative to total debt. Breaking a covenant can trigger default even without a missed payment, which catches businesses off guard during downturns.
Trade Credit
Nearly every business uses trade credit by buying supplies or inventory on account and paying later. A supplier offering “2/10 Net 30” gives the buyer a 2% discount for paying within 10 days, with the full amount due in 30. That 2% looks small, but skipping the discount to hold cash for an extra 20 days works out to roughly 36.7% on an annualized basis. Trade credit is free inside the discount window and surprisingly expensive outside it.
Equipment Financing
Equipment leases and equipment finance agreements both let you acquire machinery, vehicles, or technology without paying the full cost upfront. The difference is ownership. Under a lease, the leasing company owns the equipment and the business returns it or buys it at term end. Under an equipment finance agreement, the business is treated as the owner from day one, which means it can claim depreciation deductions but also carries full responsibility for insurance and maintenance. Leases give you flexibility to upgrade; finance agreements build equity in the asset.
Corporate Bonds
Larger companies can borrow directly from investors by issuing bonds, which are formal IOUs sold on public markets. The company promises a fixed coupon and the return of principal at maturity. Bonds let companies raise sums larger than any single bank would lend and lock in rates for long periods. Legal fees, underwriting, credit ratings, and ongoing disclosure make them impractical for smaller firms.
Mezzanine Financing
Mezzanine debt sits between senior bank loans and equity on the risk spectrum. Mezzanine lenders accept a subordinate position behind senior creditors, so they get paid last if the business defaults. In exchange, they charge higher interest and typically receive warrants giving them the right to acquire a small ownership stake, usually between 1% and 5% of equity, exercised at a sale or IPO. This structure shows up in leveraged buyouts and expansion deals where the business has used up its senior borrowing capacity but doesn’t want to give away a large equity stake.
Why Debt Is Often Cheaper Than It Looks
Interest on business debt is generally tax-deductible, which is a core financial advantage of debt over equity. A company in the 21% corporate bracket that pays $100,000 in annual interest effectively spends $79,000 after the tax benefit.1Office of the Law Revision Counsel. 26 US Code 163 – Interest Larger businesses face a cap on how much interest they can deduct in a year, but businesses with average annual gross receipts of $32 million or less over the prior three tax years are exempt from the cap entirely and can deduct all of their business interest.2Internal Revenue Service. Revenue Procedure 2025-32 That threshold adjusts for inflation each year, so most small businesses never hit it.
Selling Ownership
Equity financing means selling pieces of the company. There’s no fixed repayment and no interest, so there’s no risk of default from the funding itself. The cost is dilution. Every new investor takes a slice of future profits and often a voice in strategy. Over the long run, equity is the most expensive capital, because investors expect returns higher than any lender charges, and those returns come out of profits for as long as they hold the shares.
Founder, Friends, and Family
Most businesses start with the founder’s savings, often topped up by money from friends and family. It’s the simplest equity to raise and the most emotionally complicated. There are no institutional due diligence processes and no standardized terms, and mixing personal relationships with financial risk has destroyed plenty of both. Document any early-stage investment from people you know with written agreements that spell out the terms clearly.
Angel Investors and Venture Capital
Angel investors are typically wealthy individuals investing their own money in early-stage companies, writing smaller checks in exchange for a minority stake and often providing mentorship. Venture capital firms manage pooled investor funds and write much larger checks, but they expect significant ownership, board seats, and influence over strategy. VC-backed companies feel pressure to grow fast enough to deliver returns within a fund timeline of roughly seven to ten years. The model fits high-growth businesses aiming for an acquisition or IPO. It’s a poor fit for companies content with steady profitability.
Convertible Notes and SAFEs
Very early-stage startups often raise through convertible notes or Simple Agreements for Future Equity (SAFEs). Both instruments put off the “what’s the company worth” question until a later round when there’s more data to answer it.
A convertible note is a loan that converts into equity at the next priced funding round, typically at a discount to what later investors pay. It carries an interest rate and a maturity date, so if the company never raises again, the note comes due as debt. A SAFE works similarly but isn’t a loan. It has no interest rate and no maturity. It simply converts into shares at the next equity round, usually with a valuation cap that protects the early investor from heavy dilution if the company’s value jumps before conversion. SAFEs are simpler and cheaper to execute, which is why they’ve largely displaced convertible notes for the earliest raises.
Common and Preferred Stock
Publicly traded companies raise equity by selling shares on stock exchanges. Common stock carries voting rights and represents the residual claim on company assets, meaning common shareholders are last in line in a liquidation. Preferred stock trades voting rights for priority: preferred shareholders receive dividends before common holders and have a higher claim on assets if the business is wound up. The fixed dividend on preferred stock makes it behave somewhat like a bond, which is why it’s often described as a hybrid.
Regulation Crowdfunding
Since 2016, businesses have been able to raise capital from the general public through online crowdfunding platforms registered with the SEC. A company can raise up to $5 million in any 12-month period under Regulation Crowdfunding, and non-accredited investors can participate within limits tied to their income and net worth.3U.S. Securities and Exchange Commission. Regulation Crowdfunding The channel didn’t exist before for small companies that couldn’t attract venture capital. The trade is regulatory overhead: offering documents filed with the SEC, financial statements, and annual reporting on how the money was used.
The Rules That Apply When You Sell Equity
Selling ownership is regulated by federal securities law. Any business raising capital by offering equity needs to either register with the SEC or qualify for an exemption. Most private companies rely on Regulation D exemptions. Rule 506(b) lets a company raise unlimited capital but prohibits public advertising, and allows up to 35 non-accredited investors in any 90-day period, with accredited investors permitted to self-certify. Rule 506(c) lets the company advertise broadly, including on social media and television, but every investor must be accredited and the company must take reasonable steps to verify that status through documentation like tax returns or brokerage statements.4U.S. Securities and Exchange Commission. Exempt Offerings An accredited investor must meet one of two financial tests: individual income above $200,000 (or $300,000 jointly with a spouse) in each of the two most recent years with a reasonable expectation of the same in the current year, or a net worth exceeding $1 million, excluding the value of a primary residence.5eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
SBA-Backed Loans
The U.S. Small Business Administration doesn’t lend directly to most businesses. It guarantees a portion of loans made by participating banks, which makes lenders willing to extend credit to smaller or riskier borrowers than they’d otherwise approve. Two flagship programs cover most situations.
SBA 7(a) Loans
The 7(a) program is the SBA’s most flexible loan, funding working capital, equipment, and real estate alike. The maximum loan amount is $5 million.6U.S. Small Business Administration. 7(a) Loans The SBA guarantees up to 85% of loans of $150,000 or less and up to 75% of larger loans, which reduces the bank’s exposure and typically results in lower down payments and longer repayment terms than conventional commercial loans.7U.S. Small Business Administration. Terms, Conditions, and Eligibility
SBA 504 Loans
The 504 program is built for major fixed-asset purchases like real estate and heavy equipment. It uses a three-party structure: a conventional bank provides 50% of the project cost, a nonprofit Certified Development Company provides 40% backed by an SBA-guaranteed debenture, and the borrower puts up the remaining 10% as a down payment. The maximum 504 loan amount is $5.5 million.8U.S. Small Business Administration. 504 Loans The 10% down payment is a significant advantage over conventional commercial real estate loans, which often require 25% to 30% down.
When Banks Say No
Not every business qualifies for bank loans or can attract equity investors. A growing set of alternative products fills the gap, usually at substantially higher cost.
Invoice Factoring
Factoring sells your unpaid customer invoices to a factoring company at a discount in exchange for immediate cash. The factoring company then collects from the customer when the invoice comes due. Discount rates typically run about 1% to 5% of the invoice value per month, depending on the customer’s creditworthiness and the invoice terms.
The important distinction is between recourse and non-recourse factoring. With recourse factoring, which is the more common arrangement, the business must buy back any invoices the factor can’t collect on. Non-recourse factoring shifts most of that collection risk to the factor, but the protection is usually narrow, covering specific scenarios like customer bankruptcy rather than general non-payment. Non-recourse arrangements carry higher fees to compensate.
Merchant Cash Advances
A merchant cash advance provides a lump sum in exchange for a fixed percentage of the business’s future daily credit card receipts or bank deposits until a predetermined total payback amount is reached. Factor rates commonly run from 1.15 to 1.45, meaning a $100,000 advance might require repaying $115,000 to $145,000. In annual percentage terms, the effective cost often exceeds 50% to 100%.
MCAs are technically structured as purchases of future receivables rather than loans, which historically placed them outside state usury laws. Courts have increasingly scrutinized that distinction, and when the agreement effectively guarantees repayment regardless of business performance, some have recharacterized the arrangement as a loan subject to lending laws. Treat an MCA as among the most expensive capital available and a last resort.
How to Pick Among the Sources
Match the duration of the funding to the life of what you’re funding. Financing a 20-year building with a one-year line of credit forces constant refinancing and exposes you to rate swings and the risk a lender won’t renew. Financing a temporary inventory spike with a 10-year term loan saddles you with payments long after the inventory is sold.
Short-term needs like seasonal inventory, payroll gaps, and receivables timing mismatches belong with short-term sources: lines of credit, trade credit, and factoring. Long-term investments like real estate, major equipment, and business acquisitions belong with long-term sources: term loans, SBA-backed financing, bonds, or equity.
Then stack the sources by cost. Retained earnings are cheapest, because there are no transaction costs and no external obligations. Debt comes next, helped by the deductibility of interest. Equity is the most expensive over time, because investor returns have to beat what lenders would have charged and those returns come out of profits indefinitely. Most businesses settle on a blend that keeps borrowing costs low while holding enough equity to absorb a bad year without tripping a covenant.