This is part four of a four-part series written on obtaining funding for a startup company.
(article continues below)
If you're just joining me now, you've missed articles on friends and family business investments, venture capital investments and traditional bank loans.
In this final installment, I would like to discuss the amount of money needed to start a business and briefly talk about how you can estimate that amount.
Indeed, it is important to have an estimate of how much funding your startup company will actually require prior to applying for financing or discussing with investors.
However, they may not require you to have a firm number until it comes time to close on your loan or sign the final agreement.
For example, we estimated costs for a startup at $105,000. After using some of the contacts I had gained and getting set prices on equipment, the price became firm at $89,597. If we would have taken additional funding we didn't need, we would have had more capital but would also need to pay additional interest. We made the decision to save on the interest.
These are things to consider when estimating what you will need. You want to find the best deals on equipment and supplies but not get poor quality. Some of the main things I considered when determining my final amount for financing that may help were:
- cost of equipment;
- startup inventory;
- initial payroll;
- fixed expenses; and
- estimated sales
There are of course many more things to consider but hopefully these will get you on the right track.
As I said in previous articles, I have seen many businesses fail because they are undercapitalized. They don't have enough funds. You may want to raise some extra working capital. Think through some worst-case scenarios. After an analysis, you will need to make the decision to see if it is worth the extra interest to have the extra cash on hand.
There are different software programs out there that can help you estimate all of the things you will need the capital for. The bank is also a good resource. If you are borrowing from a commercial loan officer, they have vast experience in estimating and pricing startups and would be more than willing to help in this aspect.
Don't be afraid to ask for help when starting a business. In fact, that is probably the best advice I can give in this series.