More people are jumping into entrepreneurship as the coronavirus pandemic subsides. It’s an appealing option when you compare it to working for someone else.
You’re your own boss. You no longer have to be at the office during set hours. You don’t have to ask permission for time off.
There are risks to starting your own business. About 20% of businesses fail in the first year. The main reason why many of them close is that they lack cash flow.
Knowing the cost to start a business is a key factor in having the cash flow to make it through the first year and thrive for years after that.
Starting a company isn’t easy, but if you want to do it right, you should keep reading.
Find out the costs to start a business and ensure you have the business funding you need.
How Much Does It Cost to Start a Business?
There are a ton of factors that go into the cost to start a business. The main factor is the type of business.
A manufacturing company can have startup costs of half a million dollars or more. A dropshipping business can have minimal costs.
How can you figure out your startup costs? Write a business plan. This gives your business a better chance to do well because you become aware of the risks and opportunities in the marketplace.
Within your business plan are financial projections. Here’s where you’ll outline the costs to start up your business.
Take into account every single thing, including licensing fees, permits, office supplies, advertising, payroll, and taxes. The end result is the amount of money you need to open your doors.
Another spreadsheet has your sales projections. This is the amount of money you expect to earn in the first year or two of the business.
Cash Flow Beyond the Startup Figures
Entrepreneurs are an overly optimistic bunch of people. They look at their sales projections and think that they’ll have a fully operational business in a month or two.
That doesn’t happen often.
What usually happens is that there’s an initial wave of sales and support from friends and family. That’s usually enough to sustain the business for a couple of months and give you a false sense of optimism.
The next few months are challenging because you have to convince people outside of your inner circle to buy from you.
Most entrepreneurs don’t account for this lull and don’t have enough cash on hand to reinvest in the business. A vicious cycle of survival occurs, where they’re just getting by from one month to the next.
Why is this important to remember when you start your business? You have to have enough cash on hand to pay for operational expenses beyond the first few months.
Ideally, you want to have enough to get by the first 12-months. That takes a lot of pressure off of you from having to take on bad clients or clients that you can’t serve just to get money in the door.
How to Get Startup Financing
You should have a solid idea of how much money you need to start the business and keep it running in the first year. The remaining question is how to get the business funding.
You can self-finance if you already have money saved up. It’s the top way for entrepreneurs to fund their new business venture. This is risky because you can lose money if your business fails.
If you do decide to self-finance, make sure that you don’t use retirement savings or refinance your home to do it. That leaves you in a horrible financial and personal position if you lose the business.
Another option is to ask friends and family for help. They’re more than happy to help, but you have to make them understand the risks of the investment.
You should examine all of the options available to you and choose the one that gives your business the best chance to thrive.
Crowdfunding became a popular way for startups to raise money quickly and easily. Successful campaigns raise about $33,000 on average.
The potential pitfall is that less than half of these campaigns are successful. You have to be very clever with your campaign.
Crowdfunding works well with brands that have a great story to tell and have a knack for telling it on social media. It takes a lot of planning and a great story to get people to care.
You should also have a compelling product that people would love to get their hands on. Your incentives can make up for a lack of stellar storytelling.
Your best bet is to study the most successful crowdfunding campaigns. Look at what they did and what they offered. Take some of those lessons and apply them to your campaign.
A personal loan relies on your personal credit to finance your business. These types of loans are easy to obtain, but you’re unlikely to get a good interest rate.
The other limitation is the amount of money you can borrow. Personal loans range from $1,000 to $100,000.
They can be a massive burden if you rely on a high-interest personal loan for your first year in business. Not only that, but you also have to pay the loan back right away, leaving you with another operational expense.
Commercial loans are tailored to the needs of businesses. There are loans for equipment financing, startup capital, or renovations.
These loans will look at your business credit first. If you don’t have business credit because you’re a startup, your personal credit and business plan are used.
Some lenders offer alternative methods of financing. A company like Intrepid Finance offers lines of credit.
A line of credit is like a credit card, but usually for a lower interest rate. You have a set amount of credit that you can borrow against and pay down the credit as soon as you can.
SBA loans are great for many startups because they have low-interest loans backed by the Small Business Administration.
Even though this is a viable option, you have to read the fine print with SBA loans. That’s because you’re essentially bringing the government on as a business partner.
For instance, if you get a loan above a certain amount, you have to provide collateral. You can’t sell that collateral without the written permission of the SBA.
How to Obtain Business Capital
It’s essential to have two things to finance your startup: good personal credit and a solid business plan.
Good personal credit shows lenders that you’re responsible with money. Your personal credit is used to determine your interest rate and loan approval.
The business plan shows lenders that you understand the obstacles in your business. It gives lenders a sense of confidence because you have a strategy to build your business.
Take a look at your personal credit report to make sure that you don’t have late payments attached to your credit report. Check for any errors and get them removed as soon as you can.
You’ll need to have an amount of business capital in mind. You should have those figures from your business plan. You may want to add 10% on top of that figure as a contingency.
Once you have the number in mind and you know what the funds are used for, determine the right type of business financing you need.
You may only need a small amount of funding. In that case, you can self-finance or get a personal loan. You may need a lot of business capital that requires special equipment financing and a business line of credit.
Find Lenders to Work With
Take the time to shop around for lenders. There is no shortage of good lenders out there that offer loans to fit your needs.
Start by asking for recommendations from people within your network. You can stop by your local bank to learn about their financial products for small businesses.
As you get to know different lenders, compare the terms of each loan. Look at the interest rate, administrative fees, pre-payment penalties, and lender reputation.
Go through the process to get pre-approved for a loan with several lenders. You can compare the terms and make a decision.
The Cost to Start a Business
What’s the true cost to start a business? It depends on your startup expenses and monthly operational expenses.
It’s a good rule of thumb to have enough cash on hand to last your first year in business. Your business will be in a great position to last for years.
Did you enjoy learning about business financing? Check out the other articles in the Finance section today!