Deciding to start your own business is not a decision to be taken lightly. You may have, what you think, is the perfect idea for a product or service, but there is a wealth of issues that you must carefully consider before getting started.
Starting your own business comes with many trials and tribulations. Entrepreneurs quickly find that developing their idea for a product or service is often the easiest part of becoming a small business owner.
Little do many of them know, or prepare for, the extensive amount of work they will have to do to find the funding option that is most appropriate for them. Entrepreneurs may be surprised at the difficulty they may face in funding their ideas. That’s not to say that funding options are not plentiful. In fact, it is just the opposite. Some may simply find there are so many options available that they do not know where to begin.
Sorting through them all to find the one that best suits your business needs could rival developing the idea in the first place.
Here, we’ll go over the basic expenses to expect in starting your business, and how to calculate them all in your budget. We’ll touch on traditional funding options, i.e. loans, and where to start there.
Technology has made funding small businesses easier than ever, and one needs to look no further than crowdfunding to see this. We’ll detail the nuances of crowdfunding given that it has become one of the most popular ways for startups to capitalize their businesses. So impactful is crowdfunding that the federal government stepped in with legislation that makes it even easier.
Immediate expenses to expect
Let’s start with some of the most common expenses you will incur to start your business.
After you’ve come up with your business idea, there is a plethora of expenses that you will have to incur. Many of them may not be directly related to developing your product or service.
Instead, these expenses relate to you getting your business up and running. Before you open, you may want to conduct market research to gauge interest in your idea.
While driving around to run errands for your business, you can rack up some serious miles on your vehicle you may incur for advertising your business.
Then there are the costs of putting a staff in place in the beginning. In addition to these wage costs, you may have to pay fees for attorneys and accountants.
These expenses are just the tip of the iceberg in terms of your expenses. It largely depends on your business.
It has been estimated that the average costs of starting a business can exceed $30,000. However, considering no business is the same that amount could be seriously flawed.
Also, the costs will be much lower for home-based businesses. The SBA notes that another low-cost option to start a business is through a franchise. According to the SBA,” while your average Main Street franchise may require a larger investment, home-based franchises can be started with as little as $1,000 to $5,000.”
Preparing a budget
There are some basics about expenses you should understand to prepare your budget. This includes understanding your one-time costs versus your recurring costs. Also, understand the difference between your fixed costs and your variable costs. Fixed costs typically consist of overhead, such as those for leases and renting your office. These costs may account for the largest chunk of your budget.
When estimating your expenses, you should be as detailed, and as honest as possible. Underestimating can be disastrous. Once you’ve come up with a dollar amount for your expenses, a good rule of thumb is to have at least one month saved up to cover them.
Getting the money
Once you prepare your budget, you’re ready to explore funding sources. The typical route is to obtain a loan from a bank. The best place to start is the SBA, which specializes in providing loans to small businesses.
SBA loans include:
- General small business loans are the most popular
- Microloans provide small and short-term loans
- Real estate and equipment loans
- Loan programs can help you expand your business
You can also go to your own bank for a loan. Generally, you must have top-notch credit. You will likely have to make a down payment or have some form of collateral. If you go through a credit union, community or regional bank, you may be able to get a more favorable interest rate. Their qualifying terms may be less stringent.
The nuances of crowdfunding
Over the past several years, crowdfunding has become a popular way for startups to raise funds for their businesses. Using these platforms gives startups, and even existing businesses, the chance to “get consumer validation before they commit big money,” Consumer Affairs notes.
“No matter the size of the company, crowdfunding is frequently used as an alternative avenue to replace traditional venture capital money or unattainable bank loans.” – Consumer Affairs
The first thing to know about crowdfunding is the type of money that can be raised. There is equity crowdfunding, and there is debt crowdfunding.
While most think of crowdfunding as involving equity, there are debt crowdfunding campaigns. These involve the capital raiser receiving the funds as a loan. Like any other loan financing, you are limited to receiving a certain amount, and that must be repaid within a certain amount of time. Interest rates usually apply.
Unlike loans that you receive through a bank, debt crowdfunding can get you the money more quickly because you avoid the, sometimes, lengthy approval process. When it comes to approval, the requirements are less stringent than those of banks, which can make qualifying easier.
The most crucial thing to know about debt crowdfunding is the APR of the platform Because it varies, it’s best to shop around and compare the rates. Also, some of these platforms can limit the amount
Other caveats of debt crowdfunding include:
- Withdrawal fees
- Limits on borrowing amounts based on your revenues
- Minimum borrowing amounts
Fundingcircle, Kickfurther, Kiva Lending Club, and Prosper are examples of platforms that provide debt crowdfunding.
Giving up a stake of your business
If you’ve watched the popular network show Shark Tank, you’ve seen business owners squirm at the thought of giving up equity in their businesses. However, the “sharks” often demand a considerable percentage of the business for the hundreds of thousands, or even millions, of dollars they could sink into the business.
This applies to equity crowdfunding, but to a much lesser extent. In exchange for receiving funds through most crowdfunding campaigns, handing out a coffee mug, t-shirt has done the trick to “thank” the investor for their contribution.
However, that has changed thanks to a new law that went into effect to help startups better access the equity and capital markets.
Through the JOBS Act (Jumpstart Our Startup Businesses) Act, small companies have more opportunities to raise funds. No longer are they limited to raising money from accredited investors. This status applies to investors whose net worths are at least $1 million.
The JOBS Act considerably lowers that minimum net worth requirement to $100,000 for individuals. Also, startups can raise up to $1 million. The provisions of the JOBS Act are enforced by the U.S. Securities and Exchange Commission. This gives business owners added comfort and protection.
Another plus of the JOBS Act is it can help businesses eventually become publicly-traded companies by lessening some of the onerous and expensive requirements of initial pubic offerings. Of course, becoming a publicly-traded company means giving up a stake of your business, but the long-term benefits could outweigh this if your stock price soars.
The JOBS Act was only passed into law in 2012, so there haven’t been many businesses that have gone from private to public through its provisions. However, many startups have benefitted from the law’s provisions that relax many of the requirements to raise capital.
Making the best out of crowdfunding
In determining which crowdfunding platform to use, there are a host of things to consider besides the costs. Look for the site to have been approved by the U.S. Securities and Exchange Commission and FINRA, which is the Financial Industry Regulatory Authority.
Also, look for companies that provide administrative support, such as bookkeeping. These can be handy for entrepreneurs who have limited time to handle such tasks.
Some of Consumer Affairs’ best-rated crowdfunding platforms are: CircleUp, Crowdfunder, Fundable, GoFundMe, Indiegogo, Kickstarter, and MicroVentures.
Find out if the platform provides access to reputable venture capital investors like Peter Thiel and Andreessen Horowitz. Such is the case with SeedInvest. While this is a definite plus with its platform, one of the drawbacks is that it is hard to qualify and the platform focuses on larger funding rounds, notes FitSmallBusiness.com.
As pointed out about SeedInvest and its focus on larger funding rounds, know how much money you stand to be able to raise. If you don’t need large rounds of funding, search out platforms based on their capital raise options. For example, EquityNet allows for smaller capital raises. In fact, you could raise as little as $10,000, or as much as $10 million, according to FitSmallBusiness.com.
Naturally, pay attention to the costs. Usually, fees are based on percentages, which can begin at 3% of the amount raised for you. Some platforms also charge monthly fees, depending on the length of your campaign.
As you can see, funding your startup is a piece of cake right? No!
Your options are bountiful. This is why proper planning, such as detailing your expenses and preparing your budget, are imperative. You must understand exactly what your costs are to develop your product or service and getting it to the market.
Your budgeting plans will carry on into you operating a successful business. One of the main reasons businesses fail in the early stages is because the run of money.
Armed with a formidable business plan and budget, you can approach funding sources. Whether it be your local bank or the SBA for a loan, or an online crowdfunding platform being prepared for the amount you need will help tremendously.
Author: Tedra Williams DeSue
Tedra has been a finance/investment writer for more than 20 years. Her areas of expertise range from dividend growth stocks to municipal and corporate bonds. She also writes about personal finance and small business issues. Her work as a finance writer has been published in The Bond Buyer, Forbes, The Street, Yahoo Finance, Insider Monkey and NBC News.