Starting out broke puts undue pressure on the Owner to make end’s meat and survive. It leaves no wiggle room and that’s no fun. Especially when you have no room and no credit!
It’s difficult to get excited about a business when you’re in ‘survival mode’.
Why do you need cash to start a business?
When starting up the business you’ll need to buy equipment and supplies. How much ‘stuff’ and what ‘stuff’ you need to buy will depend on the business you’re starting. If you’re starting a consulting business most likely all you’ll need is a computer, e-mail and internet access. Your startup costs will be minimal. On the other hand if you’re starting a landscaping or lawn care business you’re going to need a lot of equipment. That’s going to require some funding.
What happens when something goes wrong and you need money fast to cover a shortfall or a crisis purchase? If you don’t have any cash it could quickly put you out of business. Make sure you have a reserve to cover such emergencies.
The ups and downs of cash
The unfortunate thing about small business is that you don’t always get paid by your clients right away, but the bills keep coming in the mail. You’ll need funds to pay your bills while you’re waiting for the check that’s ‘in the mail.’ Employees and vendors still have to be paid and most of them don’t care if you haven’t gotten your check. Vendors will put a hold on your account and employees will stop working.
How much cash do you need?
How much you should have on hand depends on many things. Do you need to hire employees right away? Will you have clients who can support you and the business on day one? Is there rent to pay on a facility or leases for equipment? All these things will affect how much money you need to have at the start. Starting a legal, accounting or marketing firm will require very little cash because you can start the business slowly and build the revenue over time. You won’t have to hire employees in the beginning and therefore, you save money.
We believe that any business should be started as simply as possible.
Start slowly! Build up the revenue and sales to establish the growth. Don’t try to buy growth with cash, that rarely works and it’s risky! If you definitely need cash and don’t know where to get it, then read on…..
Where to get cash if you don’t have enough?
One of the conventional ways of getting money to start a business is through your local bank. Preferably this is a bank where you have a personal relationship and an account for your business. They’re going to be more apt to loan money to a local business when they know who you are. Going to a BofA or Chase is not going to get you very far.
At the bank you could take out a home equity loan (if you own a house), a short term personal loan or a business line of credit. They each have their pros and cons so consider what you’re doing carefully.
The United States Small Business Administration (SBA) has many loan programs for small businesses. They fit into different categories and can sometime be difficult to understand. Make sure you get help from someone with experience in SBA who can guide you through the process.
Online and private lenders
There are many private lenders who are online or local. They too can provide you with the funding necessary to start your small business. Watch the terms and rules very carefully with these types of loans. You could be surprised at some of their requirements!
A money partner
Many people will go into business with a partner who has money to support the starting business. This can work out really well or really bad. Make sure you’re going into business with someone you trust and like. You’ll need to have complimenting talents and skills. That’s the only way a partnership is going to work. If you’re only doing it because they have the money you need, don’t do it!
Friends or family
This is another funding source that can be really good or bad. Borrowing money from friends or family should be just like borrowing from a bank. Commit to certain terms and pay the money back quickly. Taking too long to pay the money back or skipping payments can be very uncomfortable at parties or family gatherings. They may not say anything to you about it, but you can bet they’re thinking it! If you can, avoid borrowing money from friends and family.
With any of the above funding sources make sure you fully understand what you’re getting yourself into. What is the interest rate, term and repayment rules you will be committing to? Is it possible for you to repay in a reasonable amount of time?
What not to do with start-up cash.
The best financial advice from owners who have been through the tough times is don’t overextend yourself! Don’t borrow more than you can pay off in a reasonable amount of time. If you’re just starting out, do so slowly and build things up as close to debt free as possible. If you’re already in business cut back on overhead before you take on too much debt. You’ll be a whole lot better off because of it.
If you take out a line of credit at the bank make sure you use it as a line of credit and not a permanent loan. A line of credit is meant to be used little bits at a time and then paid off quickly. Some companies will borrow all the way up to the limit and then not pay it back. This makes the bank nervous because they worry about getting paid. Borrow only what you need for short term cash flow crunches. If you need to borrow it all for the foreseeable future then you should look at cutting back on overhead and other costs first.
Remember, the bank has the right to call your note at any time and demand full re-payment. Make sure you keep them happy.
Use credit cards sparingly or not at all. The rates on credit cards can eat your business alive. It doesn’t take long to build up a huge credit card bill and it can take forever to pay it back. The rates are usually outrageous on credit cards. You might as well find a loan shark!
What if you don’t have any money and can’t borrow any either?
Give yourself some time. Keep working at your regular job and look for ways to save money. If you have a decent job that makes you a living, you should be able to save enough over a year or so to start a business. You shouldn’t need a million dollars in the bank, just enough to get you off the ground.