What Are the Most Common Ways of Financing a Small Business?
February 17, 2021

What Are the Most Common Ways of Financing a Small Business?

Many people dream of one day owning their own business. But there’s one question you need to answer: How will you fund your business? There are plenty of options to choose from, but as with everything in life, there are pros and cons. Outlined below are some of the most common ways to finance a small business.

While owning your own business may be a dream come true, some dreams may turn into nightmares if you’re not careful. If you’re facing debt because of your business, it’s important to remember that you have options. Contacting a debt attorney is the first step.

Draw from Your Savings

The most common way to start a business is to draw from your savings. This is also known as bootstrapping. On the one hand, drawing from your savings means you’re not going into debt right away. Having to pay a lender back may not be ideal, especially if you’re spending more money than you make.

On the other hand, using your own money can put you in a bad financial situation. If the business doesn’t work out, you’re out of money and may not have any savings left. Additionally, if you need more money down the road, you won’t have your savings account to fall back on.

Business Loans and Lines of Credit

Business loans and lines of credit are two of the most traditional ways to finance a small business. There are many different loan types you can apply for as a small business owner:

  • Short-term loans
  • Long-term loans
  • Development loans
  • Equipment financing

The one thing to remember is that business loans are generally more difficult to obtain than personal loans, especially if you’re a first-time business owner.

A business line of credit may be easier to obtain. You can draw upon it as needed, then repay those amounts. With loans, you’ll receive the full amount upfront, and you must pay back the full amount.

Friends and Family

Asking friends and family to back your business may be the best option if you don’t have enough savings or can’t obtain a loan or line of credit. The upside to asking friends or family for a loan is that they may charge you a lower interest than banks or no interest rate at all.

On the downside, if you don’t have the return investment to pay them back, it may harm your relationship. You may also have to worry about the loaner acting as a partner. Since they gave you money, they may want to have a say in the decision-making process.


Crowdfunding is another way to finance your company. You can raise money from sites such as Kickstarter or GoFundMe. This may sound like an easy option, but they often require a considerable time commitment and a fantastic marketing plan. These websites also take a percentage of the funds raised.

Microloan Program

The Small Business Administration (SBA) sponsors multiple businesses through microloans. However, microloans tend to be better for start-up businesses. The program offers up to $50,000 in capital that you can use to start your business.

Microloans are a good option if you don’t need a lot of money or don’t want to pay your loans back over longer than six years. With SBA microloans, you’re more likely to have a lower interest rate compared to loans from banks.

It’s important to know that you can’t use an SBA microloan to pay off existing debt or buy real estate.

Contact a Business Debt Attorney

Life happens, and things don’t always go the way we plan. We understand that. At McCarthy Law, we have helped many entrepreneurs find their way out of debt. We will sit down with you to better understand you, your debt, and your challenges so we can develop a plan best suited to you. Let us take the burden from you so you can get back to focusing on your business.

Call (855) 976-5777 or complete a contact form to schedule a free consultation.

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