You may have a great idea for a business. It may be just the thing to solve a problem. Maybe you’re on a mission to save the world. Perhaps you have a better mouse trap. Whatever the reason that gets you going, be sure you have the capital needed to get started and sustain your activities until your revenue stream is reliably solid.
How much money do you need to start up?
Shopify estimates that business owners spend about $40,000 in their first year. But each business is different and only you know what’s needed to get going. It depends on:
- The nature of your business. Obviously, if your business is inventory-based, you’ll need to invest in product as well as a website (for ecommerce) and/or a storefront. If you’re going into a trade that uses expensive tools or machinery, there’s going to be a big investment upfront. If you’re starting a consulting business, it may require very little upfront capital.
- What you expect to spend money on. In addition to a website, inventory, and equipment, other startup costs may include creating a website, marketing, paying rent, carrying insurance, and more.
- How quickly you expect to monetize your activities. Some businesses take a long time before there are any returns. For example, full-size apple trees from seed take 6-10 years to bear fruit. Others types of businesses, such as drive share and delivery services, can immediately see revenue flow in.
- Whether you need funds for personal living expenses during the startup phase. If you have a spouse, significant other, or still live with parents, your personal living expenses may be covered in whole or significant part by someone else. If not, you’ll need to have enough money to carry you until the business generates revenue to backstop your business and personal overhead.
The SBA has resources to help you calculate your startup costs.
Your money or OPM?
Once you have a good idea about your startup costs, then consider where the money will come from—your own resources or other people’s money (OPM). Shopify found that 66% of business owners used their personal savings. Another 23% found money through family and friends. But there are other resources that may underwrite your startup, explained later.
Debt, equity, or something else?
Knowing how much you need to raise is one thing. Understanding the type of financing that may work best for you is another. The two main types of financing are:
- Debt. This is borrowing money, from those you know, or from commercial or nonprofit sources. Whatever the source, you’ll have to repay what you borrow. On top of this, there’s an interest charge (although fully tax deductible for small businesses). What this means is that debt is a drag on your cash flow. You must allocate a portion of your revenues to cover this debt service.
- Equity. This is taking in investors who share in your profits and losses. There is usually no requirement that they are paid anything, other than distributions according to the terms of any agreement you make with them and in view of the profits of the business. Investors are permanently attached to your business until they sell their interest, which may be you, the business, or an outsider.
Another type of financing is grants. This is “free money” because you don’t have to repay it and the party making the grant does not get any ownership interest in your business. But grants are not easy to find and may be limited to special types of businesses (e.g., those engaged in research activities, those promising to bring jobs to the area).
Resources for financing
When looking beyond family and friends for capital to start up, don’t look at banks or credit unions. Typically, they offer loans for established businesses (those with about 2 years under their belts). The same is true for “angel investors” that providing funding for growth for existing businesses. But it may still be possible to obtain startup money through grants, loans, or crowdfunding. Some resources:
- Crowdfunding platforms. They may offer funding via loans, gifts, or equity. These include platforms provide a forum to raise money, typically for a business project—perhaps an artistic one or one offering corporate social responsibility. FundRazr, Kickstarter, Indiegogo, and WeFunder.
- Finmark has a step-by-step guide for founders on how to get seed funding.
- Innovat!on Fund offers funding up to $50,000 or $150,000, depending on the nature of the business. The good thing: no repayment is required if the business is unsuccessful.
Canadian billionaire entrepreneur and co-founder of Uber Garrett Camp said: “Stay self-funded as long as possible.”
Of course, self-funding isn’t always possible, especially when you’re starting out. But get going and pursue your dream!