When starting a business, you must answer an important question: How much money do you need? Here's what you need to know about funding your startup.
Starting a business may be an exciting process, but it costs money. When determining business startup costs, it’s important to be realistic. Things like office space, legal fees, payroll, business credit cards and other organizational expenses can really add up.
If you’re thinking about launching a new business, you may not know how to choose a loan provider.
1. Start small.
You most likely have high expectations for your company. However, blind optimism may cause you to invest too much money too quickly. At the very beginning, it’s smart to keep an open mind and prepare for issues that may arise later.
Cynthia McCahon, founder and CEO of business plan software company Enloop, said business owners should start with a bit of healthy skepticism.
“A prospective business owner should start planning a small business by simply understanding the potential of the business idea,” she said. “What this means is not assuming your idea will be successful.”
The best approach is to test your idea in a small, inexpensive way that gives you a good indication of whether customers need your product and how much they’re willing to pay for it, McCahon said. If the test seems successful, then you can start planning your business based on what you learned.
2. Estimate your costs.
According to the U.S. Small Business Administration, most microbusinesses cost around $3,000 to start, while most home-based franchises cost $2,000 to $5,000.
While every type of business has its own financing needs, experts have some tips to help you figure out how much cash you’ll require. Serial entrepreneur Drew Gerber – who has started a technology company, a financial planning company and PR firm Wasabi Publicity – estimates that an entrepreneur will need six months’ worth of fixed costs on hand at startup.
“Have a plan to cover your expenses in the first month,” he said. “Identify your customers before you open the door so you can have a way to start covering those expenses.”
When planning your costs, don’t underestimate the expenses, and remember that they can rise as the business grows, Gerber said. It’s easy to overlook costs when you’re thinking about the big picture, but you should be more precise when planning for your fixed expenses, he added.
Indeed, underestimating costs can decimate your company, McCahon said.
“One of the main reasons most small businesses fail is that they simply run out of cash,” she said. “Writing a business plan without basing your forecasts on reality often leads to an unfortunate, and often unnecessary, business failure. Without the benefit of experience or actual historical financials, it’s easy to overestimate a new company’s revenue and underestimate costs.”
3. Understand what types of costs you’ll have.
The SBA states that there are various types of expenses to consider when starting your business. You need to differentiate between these costs to properly manage your business’s cash flow for the short and long term, said Eyal Shinar, CEO of cash flow management company Fundbox. Here are a few types of costs for new business owners to consider.
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