Funding a Business & How Much is Enough
Funding a business & how much is enough is a very important question as you establish your new business since you will need to decide where you will get the funds needed and how much you will need. You may choose your start up business funding from more than one source. You may use personal savings or your credit cards, receive loans from family members and friends. You might also obtain a loan from a traditional lender (if you can qualify) or from an alternative source such as a business funding website, or other business funding services or investors seeking projects to fund.
Most companies seeking funding obtain all or part of their start-up capital from a lender. Considerations in determining the amount needed include capital equipment, vehicle purchase, and maintenance. Also, included are office supplies, rent, insurance, and an inventory of any products you sell or use to produce what you sell.
First, take the time to write a detailed business plan. Second, determine the initial start-up costs. Third, determine your ongoing business costs. Compare what you are willing to invest from private funds, and any money your family or friends are investing, against the total needed. The amount left over is what you will need from business loans or business grants.
Think of your business plan as a blueprint for your business. Within it, you will need a comprehensive view of where your business is currently and the direction that you are sending it in the future. Your business plan will grow with your business and change over time. Your business plan will also include pro forma cash flow and balance sheet sections. With this information, you can determine your cash needs.
Your business plan will be required from a lender at the beginning of the loan process. Research everything you can so that you know exactly what to expect. This process takes time to research and organize and it should show what your business is, who your potential customers are, and realistic projections for the future of your company as well as cover your future projections for the next three to five years.
Banks and investors looking for projects to fund will use your business plan and other financial information – such as credit history – to decide if they will lend you funds to cover your company’s financial needs. The following questions should be answered in your business plan:
- What product or service does your business offer? Does it fill a need? What is the value of what you offer?
- Identify your primary and secondary markets and any industry trends, competitor information, your product knowledge and experience. Show your pricing plan for your product or service. The more familiar you are with the market of your product, the easier it will be for a lender to decide if your business is a good investment.
- Describe your business structure. How large is your business? How many employees do you need? Is it a franchise? Will you hire freelancers or employees? Will any work be outsourced?
- Show your public relations and marketing strategy. Lenders want to see how you intend to market, brand, and sell your product. Share any marketing strategies that will significantly shave costs while still attracting quality customers. If you have expertise social media marketing it should be reflected in your business plan and how you will use it to save on marketing costs.
- Display your excellence in your executive summary. This summary is prepared last but will be the first item in your business plan. It needs to be accurate, thorough, clear, and concise. Take your time, quality may be a deciding factor in your loan approval.
Start up costs are expenses necessary to get your business started. These cost estimates will be determined as you review your business plan. Whether your business is looking for funds from an investor or a traditional lender, start up costs will be key numbers to get financing. Such costs include legal fees, license fees, rent, marketing costs, payroll, and office supplies. They can also include property, inventory assets, capital expenses, etc. The Small Business Administration offers helpful information on how to estimate your business’ startup costs.
Begin with a comprehensive list of all items you will need to purchase. Determine what items you may not need initially. As you create the list consider all possibilities and write them down. Later you will decide what is needed right away and what might wait until your business is on its feet.
Start collecting estimates for any necessary purchases, especially on big ticket items like capital equipment, inventory suppliers, etc. As you consider any estimates you receive, look at all factors, not just the financial cost. For major costs, get several estimates or proposals. If you don’t know who to contact for estimates, check with trade unions and your network. Look for contacts that are likely to be of further help as you run your business.
Once you have a clear picture of your initial start up costs, your financials are in order, and your solid business plan is in place, you can begin exploring various lenders in your community and online to discuss your business funding.
Finally, ongoing expenses are those that happen on a regular basis – such as weekly, monthly or annually. Ask yourself what is needed to maintain the business inventory and what will that cost. What basic office costs should be a factor: utilities, internet, office equipment, etc. Will any of these items need maintenance contracts or insurance and what supplies will need to be stocked to keep them functioning? Will you need to pay rent? Will you rent or purchase office equipment? Are there any association dues or ongoing fees for software or a website?
Don’t low-ball your ongoing and operating expenses. Some items are worth getting the high-end options and some you can go for used or less expensive choices. Your computer should be a good one with more than enough memory and speed. Your desk could easily be second-hand from a yard sale or consignment store or even a free hand-me-down.
Once you have determined a price for your product or service, you can project your profit per unit. Also, factor in costs for storing inventory, insurance on inventory or other items that will affect your profit margin.
Okay, you should have a good idea now of how much funding you will need from a lender. But be flexible. Obtain what you need to get started, and if further funding is needed in the future, you can handle it as the need arises. As you evaluate your plans and objectives regarding long-term goals, you can calculate what you need to have your business thrive.