Once you’ve got a great business idea and you’ve written out a plan, you’re going to need some funds to get started. How much you need will depend on the type of business you’re launching.
How much capital will you need?
The amount of capital you need is going to depend on the type of business you’re launching. Regardless of your business, though, your startup costs are going to fall into three main categories.
- Business expenses
Your business expenses are your costs you’ll incur to operate your business. To start your business, this could include things like marketing materials, legal fees, any fees involved in registering your business, website costs, salaries and office rent.
- Business assets
Your business assets are going to cost you money as well, but they’re tangible items of value that your business owns. This could include inventory, office furniture, equipment and vehicles.
- Cash reserve
Your cash on hand, or cash reserve, is money you actually have sitting in your bank account. Its purpose is to help see your business through tough times. Most experts recommend a cash reserve of between three and six months’ expenditure. It can be tempting to keep a large cash reserve, but just remember that every dollar you tie up in cash is a dollar you can’t use to grow and expand your business.
Once you’ve figured out your startup expenses, startup assets and cash reserve, add these figures together and you’ve got the amount you’ll need in startup capital. Go ahead and add 10% to this figure to give yourself a bit of a cushion in the very likely event that some costs are more than anticipated.
What you’ll need to get started
Now that you have a good idea of how much capital you’ll need, you’re probably eager to start raising money. But before you jump into securing that sweet, sweet cash, there are a couple other details to get in order. After all, anyone investing in your business is going to want to know that you have a well thought out plan.
Hopefully you read our previous email on how to write a business plan. If you didn’t, though, here’s a brief summary of what a business plan entails:
- Value proposition: This is a summary of the solution you’re providing to customers, and what makes your solution unique.
- Market research: Your market research should detail demand for your solution and your ideal customer demographic. It should identify the market you’ll be operating in and the opportunities in that market.
- Funding: This is a summary of the funds you’ll require to get started and how you plan to use those funds.
- Milestones: This identifies the major milestones your business plans on hitting, and an estimate of when you’ll hit them.
- Resourcing: Your human resourcing should identify what roles you need to fill and profiles of the sort of staff you’ll need.
This is just a synopsis, and your business plan should go into detail on each of these points.
5-year financial projections
Any investors you approach are going to want to see financial projections for at least the first three years of your business, and some may want to see up to five years. You should break your projections down month-by-month for the first year and then by quarter for the following years.
Your financial projection will take into account your expected sales minus your expenses. Be sure to be specific, showing how you’re pricing your product or service, the number of sales you’re projecting for each month or quarter and itemizing your expenses in detail.
Put your own skin in the game
If you’re in a position to finance your own business venture, that’s fantastic. Even if you can’t entirely finance your startup on your own, you should still put some of your own money into it. It sends a signal to investors that you believe in your idea enough to back it yourself.
Get a bank loan
Banks offer a variety of loans that could help you get your business running. This could be a personal loan, which is money lent to you rather than your business. It can either be secured by some sort of asset, or unsecured. The difference is that a secured loan gives the bank recourse to take possession of the asset in the event you default on the loan.
Get a grant
A grant is any sort of gift or subsidy bestowed upon an individual or organization for a specific purpose. Grant funds don’t have to be repaid.
There are a plethora of grants available for starting a business, but that doesn’t mean there are piles of money lying around for the taking. Competition for grants is fierce, so you have to make a very good case for your business.
Get a P2P loan
Peer-to-peer (P2P) lenders match borrowers with individuals or groups of individuals with money to lend. It’s a similar concept to crowdfunding, but with more sophisticated mechanisms in place to appropriately price for risk and return.
Use a credit card
If you don’t have cash on hand and don’t want to worry about raising money from investors, you can use a personal credit card to finance your startup costs.
Seek out angel investors
Angel investors are high net worth individuals who invest money in business ventures. They can invest on their own or pool their money with other angel investors. They invest in return for equity in the business or convertible debt, which is debt that can be converted into shares in the company.
Pitch to venture capitalists
Venture capitalists represent groups of investors who pool their money to purchase equity in new business ventures. They differ from angel investors in that angel investors are investing their own personal funds, whereas venture capital firms represent investors.
Crowdfund your idea
Crowdfunding is raising funds from a large group of people, usually using an online platform. It relies on securing small amounts from a large number of individuals.
Turn to friends and family
Pitch your vision to people you already know to raise capital for your business. You can offer them an equity stake in return for their investment.
Draw on your retirement
If you’re in the US, you can actually use your 401(k) to start a business. There are several ways to do this, but the best fit for startups is known as ROBS, or Rollover for Business Startups. This allows you to draw out your 401(k) or IRA funds to finance your business venture.
PayPal Working Capital is a program that allows PayPal merchants to get a cash advance based on their total sales. It’s interest-free, but does come with a one-time fee.
Microloans are small amount loans specifically for small businesses. While microloans started as a way to encourage entrepreneurship in impoverished countries, they’re now available to a wide range of entrepreneurs who need smaller amounts of capital.
Inventory and invoice finance
This is a type of finance, also called asset finance, that uses sales or stock to secure funding. Inventory financing uses physical inventory as collateral to establish a revolving line of credit. You can draw on this line of credit as needed, and you’re only charged interest on the amount you use.
Pre-sell a proof of concept
If you’re offering a product, particularly a software product, you can raise money through pre-sales. Then you can use this money to develop the product for wide release. This differs from crowdfunding because you’re offering a one-to-one exchange of goods instead of allowing people to contribute the amount they want, and you’re not required to hit a specific funding goal before receiving funds.
Keep it low cost
OK, we’re admittedly a bit biased, but this is our favorite option. You can keep your startup costs to an absolute minimum by identifying needs that you can fulfill using freelancers. And by absolute minimum, we mean less than $1,000 USD.