“How much money do you need to start-up a business?" can be a bit of a leading question and the answer that leaps to mind is "As much money as possible!" Unfortunately, you'll need to come up with a more considered answer than that. It's tempting to do a reasonably accurate estimate, add on a bit in case of "emergencies" and then double that amount. However, you can do your business a big disfavour by acting this way.
Taking out a loan to start-up a business is a very important process and the amount applied for should be arrived at only after careful consideration. The amount you wish to borrow may well be the largest sum you have applied for in your life and there are a number of important factors to bear in mind.
The most important being the more you borrow, the more you will have to pay back.
Consequently, calculate the amount you need to borrow carefully, deciding which portion is for initial set-up costs and how much you will reserve for on-going costs. And then make sure you keep careful track of this. Remember, the more money you have at your disposal, the more you will be tempted to spend on "wants" rather than on "needs."
Consider your purchases carefully
Far too many large purchases or investment decisions are made without due and careful consideration. And this is particularly so when people have ready money at hand. All financial and investment decisions should be made from a position of strength – that is after careful assessment to make sure they are right for your business and will help it grow according to your plans. Sounds boring and practical, but it is true.
Additionally, should you borrow more money than you need and do not use it, the proportional amount of your repayments will be a drain on your business. This will tie up cash that could be better used in operating your business.
What is more, should you at a later stage want to borrow an additional amount, the lending institution will take your existing loans into consideration. If they feel you already have a high degree of borrowing for the type and size of your business, they will be very reluctant to lend you more money. The more money a business owes, particularly if it is a small business, the higher a financial risk the business is considered to be.
On the other hand, if you borrow a reasonable amount of money when starting up your business and make the appropriate loan repayments on time, you will be considered a good credit risk and new loan requests will be considered favourably. Consequently, it is important to carefully consider how much money you will need to start-up your business. This will include determining your Initial start-up cost and working capital.
Finally, when choosing between an interest-only loan or repaying both capital and interest, remember you should never take out a short-term loan for a long-term asset or investment. You will have to repay a short–term loan in the relatively near future and finding the money to do this could severely restrict your business operations.
Determining your initial start-up costs
This is an involved process requiring you to calculate the cost of every factor involved in getting your business to the stage where you can open your doors and start selling your products to your customers.
These are mainly the expenses you will usually only have to meet once and could include:
• Research costs;
• Bond for your premises;
• Remodelling costs;
• Fixtures and fittings;
• Connection fees for telephones, lights, water, etc;
• Accounting and legal fees;
• Equipment costs;
• Initial advertising and marketing costs; and,
• Purchase of initial stock and so on.
Your working capital
Working capital is the money used in a business as part of its normal operations. It helps ensure the smooth running of your business and helps it generate business and as a result, income for you. Your working capital, therefore, works to create money and if used correctly, can increase its cash value.
It is critical you have sufficient money available to meet your expenses in your start-up period. Very few new businesses open their doors and are immediately profitable. On the other hand, every year a large number of new businesses fail because they underestimated the time it would take for them to break-even and start making money.
Many of these businesses would have gone on to become successful enterprises if they could have survived this initial period. If you do not have enough cash to pay your debts and expenses as they fall due, your business will undoubtedly fail.
Forecasting expenses
It is crucial to carefully forecast your expenses for at least the first six to 12, if not 18, months and from this determine how much working capital you will need to meet your expenses.
This includes ongoing fixed expenses. These are the operating costs that remain relatively constant, such as:
• Rent or mortgage repayments;
• Interest and loan repayments;
• Wages and salaries;
• Insurance; and,
• Rates, electricity, gas, water and so on.
On top of this, and far harder to estimate, will be your variable expenses. These are the expenses which fluctuate according to your volume of fees and sales and the amount of business you conduct.
These include:
• Stock purchased for resale;
• Costs incurred in getting your products and services ready for sale (ie. wages, manufacturing, production, packaging, etc.); and,
• Shipping costs and so on.
Furthermore, you must include any other operating expenses, such as:
• Petty cash;
• Ongoing advertising costs;
• Bad debts;
• Slow payers;
• Temp staff; and,
• An allowance for unforeseen expenses, accidents and so on.