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Five Ways to Finance Your Small Business

piggy bank and calculator on top of documents

Every year, thousands of aspiring entrepreneurs start their business, hoping to get a piece of the economic pie. You can learn a lot from their launch and success stories, but it’s the things that happen before businesses are established that you’d want to know about if you also want to start your own.

One area you need to learn about the most is financing your business. If, for example, you want to acquire a franchise in the food industry? What is the cost of opening a restaurant franchise? How much do you need to save? What other financing options do you have?

Fortunately, there are plenty of answers to the last one. But if you’re unsure which option to choose, we break down each possible source of capital below.

Personal savings

These days, it’s rare that a company is built without the owner borrowing money from some kind of lender. But if you’ve been planning your business for a while and saving up for it, setting up your business without loans can be possible. This is the most ideal way to finance your business because it means you’re not in debt before you can make money.

Family and friends

Plenty of entrepreneurs get their businesses off the ground with the help of their friends and families. If you have people in your life who believe in your venture, they might be willing to invest their money in you. This means your investors have shares in your company, but you completely own it. Some friends and family, though, don’t purchase shares but simply lend you money. Using friends and family members to fun your business may be tricky, though, since there’s always a risk of failure, which means the money your loved ones invested in you will be for nothing.

Traditional bank loan

If you don’t have enough savings and friends or relatives aren’t an option, then banks are your best friends. Next to personal funds, bank loans are the second most popular financing option for small businesses. While secure and reliable, it can be difficult to get approved of a business loan from a traditional bank. They need to see concrete proof that your business is profitable so they can rest assured that you would pay back their depositors’ money.

Business line of credit

Bank Sign on Branch Facade

Another type of transaction you can get with a bank is opening a line of credit for your business. With a line of credit, the bank gives you access to a certain amount of money from which you can borrow and repay anytime until you reach the limit. But, whatever you repay, you can borrow again. This is like having a credit card for business and is a great way to ensure you’re only borrowing what you can pay back.

Factoring

Factoring is a type of financing where you sell your business’ invoice to a third-party, called a factor, at a discount. The factor will then be responsible for collecting the payment for these invoices or accounts receivable. This is an easier way to get money upfront since it doesn’t require you to have an excellent credit history. Instead, it relies on your customers’ ability to pay their invoices.

You can fund your business in plenty more ways. The best thing to do is to read up on them thoroughly so you can weigh which option is perfect for your business.

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