One of the most significant challenges of launching your own business is ensuring that you have enough money to get you past those first trying months or years. If you don’t have the proper financial resources at your disposal, your company is going to have a tough time finding the footing it needs to be successful.
Additionally, entrepreneurs need to make sure that they are realistic about the amount of time that it’s going to take for their revenues to catch up with outgoing costs. It’s possible that you might need to endure losses for the first one or two years—possibly longer—and you are going to need money to get you through those first few years.
Here are some quick ways to isolate your business’ financial needs.
Adding Up Costs
One of the first things you might want to do as a business is to add up potential costs. Costs can include professional and legal expenses that concern business registering, office supplies, permit fees, machinery, real estate, vehicles, equipment, website design, consulting services, and more.
There are always some expenses that are reoccurring such as rent or lease payments, raw materials, salaries, office and plant overhead, marketing costs, financing costs, professional fees, maintenance, and possibly more.
Once you’ve estimated your initial and reoccurring expenses, you can start to see how much money is going to be at your disposal.
Calculating Financial Resources
It’s essential to determine how much starting capital you’re going to have and the amount of money you can generate throughout the start-up phase. To calculate the latter, you need to research the market and industry averages of your company to get a realistic number.
Afterward, you can plug all estimated financial resources and expenses into financial projections for your new business. That quick projection examination is going to show you if there’s a financial shortfall. Here are some sources to fill those up:
• Personal Investment: Many start-ups need the entrepreneur to personally invest with cash or personal assets that get used as collateral to obtain a bank loan. If you see a shortage of money, you might need to add to your personal investment.
• Friends and Family: There is a majority of start-up companies that rely on capital from their friends and family. The phrase “love money” is commonly used when borrowing from family. In most cases, friends and family don’t mind waiting until your business makes a profit to get repaid. However, it can be difficult to mix personal relationships with business.
• Debt Financing: Lenders offer a variety of debt financing types that include lines of credit and term loans. Some lenders even offer loans that are designed to cater to new companies, so they come with flexible repayment terms.
• Outside Equity Financing: New businesses that have a high growth potential from the get-go might be lucky enough to secure a large dose of start-up money from “angel investors,” venture capital funds, and business incubators (also commonly referred to as accelerators). These funds are typically given in exchange for a percentage of the company’s equity.
• Subsidies and Grants: While it’s not as common as you might think, and depending on your business, you can always apply for a government grant or subsidy. These types of grants help you with the initial start-up costs that your new business needs to bypass in the hopes of being successful, though they might be quite challenging to get.
Launching and owning your own business isn’t easy, and depending on the industry that your new business is in, it can turn out to be quite expensive. A lot of people don’t have the large amount of savings that is usually required to invest in a business, and therefore almost always turn to both personal assets to get a loan and family and friends. Keep in mind that before you sign any contracts, or make any type of financial decision, it’s always smart to have your lawyer present.