A successful business needs a committed owner, a strong business concept and strategy, and financing to help the business grow and thrive. Using your own money to start and finance a business is the easiest approach, but may not be an option. Instead, you may need to obtain financing or capital from friends and family, a bank, or other sources. Regardless of the source, financing can be categorized into two options: debt and equity financing. This module explains the rules and requirements of financing options to help save you time as you begin applying for funding.
You’ve decided to turn your passion into reality by opening a small business. Now what? One of the first steps is determining how much money you will need to start this business regardless of the source. Some businesses can be started with minimal upfront capital, while others require a large initial investment to purchase inventory or equipment. You will also need money to maintain your household, and you should keep that separate from any money you use for starting your business. To decide how much you need:
Determine Your Start-Up Costs: When determining your start-up costs, think about:
- One-time charges: Include one-time items like building signage, business name registration, incorporation fees.
- Recurring costs: Include fixed costs (rent, utilities, insurance, payroll) and variable costs (inventory, shipping, sales commissions).
- Hidden costs: As a start-up, you’ll find hidden costs you didn’t include in your plan. You should have at least 10% in contingency money for these costs.
Determine Your Personal Equity: One of the first questions any financial institution will ask is how much personal equity you will bring to the table. The amount of personal equity most lending institutions require is 20% to 40% of the total loan request.
Estimate Your Monthly Expenses: It’s important to estimate your expenses as closely as possible through month-to-month cash flow projections. Asking for more money than you actually need may jeopardize your ability to secure a loan and will make your loan payment higher
If your business is already established and you want to expand, you will need to be able to show your business is profitable to be eligible for financing. If you are applying for funds due to financial difficulties, you will most likely need collateral to secure any type of loan.