Steps to Success
You’ve decided to turn your passion into reality by opening a small business. One of the first steps is determining how much money you will need to start this business.. Here we provide the basics for determining how much financing you need and where to get it but this critical process can be very complex if you're going through it for the first time. The Small Business Development Center can help you determine your needs and financing options, work with you to prepare the documentation you'll need to obtain financing, and connect you with the right lenders or other sources of funding.
How much do you need?
Some businesses can be started with minimal upfront capital, while others require a large initial investment to purchase inventory or equipment. You will also need money to maintain your household, and you should keep that separate from any money you use for starting your business. When determining your start-up costs, think about:
- One-time charges: Include one-time items like construction or remodeling costs, equipment, display fixtures, building signs, and professional fees.
- Recurring costs: Include fixed costs (rent, utilities, insurance, payroll) and variable costs (inventory, shipping, sales commissions).
- Hidden costs: As a start-up you’ll find hidden costs you didn’t include in your plan. You should have at least 10% in contingency money for these costs.
- Determine your personal equity: One of the first questions any financial institution will ask is how much personal equity you will bring to the table. The amount of personal equity most lending institutions require is 20% to 40% of the total loan request.
- Estimate your monthly expenses: It’s important to estimate your expenses as closely as possible through month-to-month cash flow projections. Asking for more money than you actually need may jeopardize your ability to secure a loan and will make your loan payment higher, but asking for too little could lead to a shortage of cash as your business grows toward profitability.
Where will the funding come from?
The list below includes the common and not-so-common sources of funding. One or more of these sources will be appropriate for your business.
- You! Savings, home equity, credit card, “bootstrap” approach if significant startup funds are not needed
- Friends and family
- Loans (banks, microlenders, government-guaranteed such as SBA loans)
- Private / angel investors
- Venture capital firms