Starting a new business is a dream for many Americans because it encompasses so many goals, including the freedom of working for yourself and the opportunity to build something from the ground up. But any entrepreneur needs a lot of confidence and a can-do attitude to launch any new business idea.
Addition Financial provides various types of financing to our business owner members, including business loans, lines of credit and business credit cards. One of the questions we get asked most frequently is this:
“How much money do you need to start a business?”
If you’re considering starting a business of your own, we’re here to help. Here’s your guide to figuring out how much money you need to start a business, plus some tips on available financing and funding options.
Let’s start with the basic question of how much money you’ll need to start a business. As you might expect, there’s no one answer that applies to every business. It costs far less to launch a sole proprietorship selling a digital product or service than it would to launch a brick and mortar business that needs to stock shelves and keep inventory on hand.
Your start-up costs may range from under $500 to tens of thousands of dollars depending on what you want to do and which assets you already have on hand. You’ll need to understand which expenses are involved and make estimates to determine your business start-up costs.
There are many potential expenses involved in starting a business, but not all will apply to your business. Here are some of the expenses you may need to take into consideration:
This might seem like a lot but keep in mind that you won’t need to spend much in some of these categories and you may be able to skip some of them entirely.
The process to estimate your total start-up cost isn’t complicated but there is some legwork involved because you’ll need to gather some information in a business plan.
The first thing to do is divide the categories above into fixed costs and variable costs, and then identify one-time expenses versus ongoing expenses. Here are some examples of each:
One-time costs are likely to be the easiest to estimate as are fixed ongoing costs such as rent. With other variable costs, you may need to gather some information to make an accurate estimate. For example, you could ask your landlord what the typical electric bill is for the space you’re renting or look online to find estimates for office supplies.
Once you have estimated everything, you’ll need to add it all up to arrive at an estimate of how much you need to start your business. We suggest adding a cushion of at least six months’ worth of expenses to carry you through any dry spells or unexpected expenses you may encounter. A lack of cash flow is one of the most common reasons that small businesses fail.
The next step is to figure out how to get the money you need to start your business. There are multiple options and some are easier than others.
If you have money saved (or you have access to a trust), you can consider funding your start-up on your own. Many entrepreneurs have done so. Self-funding might involve using personal savings or, in some cases, using a personal credit card to get the money needed. If you decide to self-fund, make sure to keep careful track of your expenses because you’ll need to differentiate your personal expenses from your business expenditures.
The next option is to get money from investors. In most cases, investors will want a stake in your company in return for their investment. You may choose to approach friends and family members to get them to invest in your company or try to attract venture capital. Most VCs are going to want a seat on your board and an ownership stake. Family members may be less stringent with their requirements but all investors will need to be paid back eventually.
Small business loans are widely available and can be used to pay for your start-up costs. Qualifying for a loan as a start-up can be tricky, though. Credit unions and banks will want some reassurance that you have the ability to repay your loan and may require collateral.
The Small Business Administration (SBA) will sometimes guarantee loans to protect lenders when there is more risk involved.
The final option is to crowdfund your business by taking donations from small donors. Crowdfunding usually comes with a built-in reward structure. For example, you might offer donors a free product or service in exchange for them supporting your business. Examples of crowdfunding sites include GoFundMe or Kickstarter.
Keep in mind that all crowdfunding websites take a fee. Some may only provide you with the funds if you meet your crowdfunding goal, so it is best to be conservative with your goal if you choose one of those sites.
You may be wondering if it’s possible to start a business with no money at all. The short answer is that it may be possible but in most cases, there is at least a little money involved.
The easiest business structure to start with little to no money is a sole proprietorship because there are no business registration fees involved. However, you may want to choose a fictitious business name and if you do so, you’ll need to pay a fee. In Florida, it costs $50 to file a fictitious business name.
If you’re selling a professional service via an online business – for example, if you’re a freelance designer or writer – then you probably need only a computer, some software and a reliable internet connection to get started. People selling handmade items can also get started with low overhead by using supplies they already have on hand.
Start-up expenses increase when you need office space, warehouse space, employees or expensive business equipment. It’s possible to start a business on a shoestring and grow it as revenue starts to come in.
Launching a business is exciting and can mark the beginning of a new era of your life. The information we’ve included here can help you understand the expenses involved, estimate your start-up costs and obtain the financing you need to ensure a successful business.
Are you an aspiring small business owner in need of financing? Addition Financial is here to help! Click here to read about our small business loans and apply today.