Startup Funding: How Much Cash Should You Borrow?
Launching a new business is hard work and a soon-to-be business owner’s main concern is always cost. As veteran startup mentor Martin Zwilling says “Contrary to popular myth, nobody is waiting in the wings to throw money at you just because you have a new and exciting business idea”.
While many would-be business owners think more is better when it comes to borrowing money, this is not the best way to think if you’re out to get a loan. Sure, you will need money to cover a wide variety of things when you’re starting a new business. But the purpose of a business loan is to grow your new business gradually and not to replace income. You certainly don’t want to put yourself into a situation where you’ve borrowed and you run out just when things are beginning to come together for your new business.
As a general rule, new businesses should have enough money to cover costs through the first six months of business. However, it is a good idea to work in a safety margin even past the 6-month mark. Here are the main expense categories you should analyze before taking out a business loan.
Marketing Costs
Take the time to figure out how much marketing your new business will cost. Include the expenses associated with business cards, signs, SEO, marketing materials and even product or service development.
payroll
Estimate the cost of your salary and the wages you will pay those working for you. Be sure to include taxes and any business fees you may have to pay to business associations or the government.
Overhead
Estimate how much your overhead will be such as your rent/mortgage, utilities, insurance, business licenses, equipment and vehicle registration costs. Consider all the “must haves” you will need to buy including computers, office supplies and furniture.
Extra Expenses
You should speak to someone who has experience in your line of business or ask a mentor for some guidance regarding how much money you’ll realistically need to get your business up a and running. This way you can get a good idea about those extra/miscellaneous expenses you’ll need to cover that you might otherwise not think of.
You’ll need to make keeping an eye on your expenses a priority because money matters can get really out of hand otherwise. As International sales expert Grant Cardone states: “Money is like a jealous lover. Ignore it and it will ignore you or worse, leave you for someone who makes it a priority”.
Use a Start Up Cost Estimator Tool
If you have trouble figuring out what your startup costs will be, take advantage of one of the many startup cost estimator tools there are available online. This type of tool will help you estimate your total business startup costs. When using this type of tool, only include those items that are absolutely essential to starting your business.
Don’t Be Greedy – Borrow Only What You Need
It’s very important to be realistic about how much money you borrow. Many businesses fail because their founders borrow too much and look at the loans as money they don’t need to pay back until they’ve turned a good profit. Then before they realize it, the loan payments are due and they’re flat broke. You don’t want to find yourself in a financial pit you can’t crawl out of just when your new business is starting to turn a profit. You must remember that you may need to begin repaying your loan before you’re actually making a profit so don’t overestimate how much you need to borrow.
