Every small business needs funding. Unless you’re independently wealthy or incredibly lucky, yours business is probably one of them.
One of the first questions you ask should be: how much should you budget in startup costs? Every business is different, but there are a couple of startup cost calculators here and here. These calculators give you a very simple, high-level look at what your business startup costs may be.
A good rule of thumb is to make sure you have enough financing to cover not only your startup costs, but your first year of expenses. There are a few lucky businesses that achieve profitability their first year, but most take 2-5 years to start generating real returns.
So how much do you have to make before you start making money? Remember that just because you generated $10,000 in sales this month, it doesn’t mean you made $10,000 in profit. If it costs you $8,000 to acquire, distribute, and sell those goods, you’re only actually making a $2,000 profit ($10,000 – $8,000 = $2,000).
You can calculate your breakeven costs by identifying your variable and fixed costs and applying a simple formula. Click here for a basic online breakeven analysis calculator.
Now that you have an idea of the costs involved in starting your business, how do you plan to fund it? There are lots of options. Young entrepreneurs just getting started might rely on friends, family… and credit cards. For most – especially if you’re looking at a business with high startup costs – this isn’t going to be enough to get your business off the ground.
There are two basic types of outside funding you can get: debt financing and equity financing. Debt financing means you’re taking on debt that you’ll have to pay back. This is financing from traditional outlets like banks. Equity financing, on the other hand, means gathering investments from venture capitalists. Venture capitalists are people who will invest money in your business in the hopes of seeing a profitable return.
The big drawback to equity financing is that you may lose some control over your business – many venture capitalists seek to have some sort control of your company, especially if your business is underperforming. You will also be sharing a portion of your profits with a venture capitalist. Of course, when debt financing, you may also offer up your business, house, or other collateral to the bank if you are unable to pay back the loan (depending on the terms of the loan). So either way, you’re beholden to someone else until your business starts to cash out.
If you decide to open a franchised business, you may also have the ability to tap into the franchisor’s funding resources. This could range from simply getting the franchisor’s backing when applying for a loan to taking out a loan from the franchisor itself. At Instant Tax Service, we offer a variety of funding options to qualified candidates.
At the end of the day, funding your small business requires a lot of research and sweat equity on your part. Be sure to pursue all the options open to you before deciding what kind of funding options are right for you. Many entrepreneurs find success by mixing and matching debt financing and equity financing paired with generous contributions from family and friends. There’s no “right” formula – just whatever works for you and your business.
For more small business funding tips, visit SBA.gov.
Tags: Entrepreneurship, Franchising
This entry was posted on Tuesday, June 23rd, 2009 at 8:40 AM and is filed under Entrepreneurship, Franchising. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
