Q: My son has a sure-fire business idea that’s gonna make us rich. Who do we see to get $100,000?
A: I was asked this question by a very serious forty-something father with his teen-something son in tow at a business opportunity fair not all that long ago.
I was tempted say that if I knew someone with that kind of money burning holes in his or her pockets, would I be standing there talking to them? However, my answer was the one any prospective entrepreneur will hear when asking for money: “Let’s see your business plan.”
Even if your business is to be an in-home affair and you’re the only employee, you need to be able to answer two questions before any lender or investor will write you a check:
1. What will it cost?
2. Who's going to buy it?
These are the questions that a business plan answers. Step one is to write a start-up budget. Go ahead and get crazy with the first one. Put in everything you think you’ll need or that would be nice to have when you start. Mink lined toilet seats. Caviar and champagne service on breaks. A corner office in the tallest high rise in town. A chauffeur. A limo. Get it out of your system now, but have fun doing it.
Once you’ve prepared this budget, get real. Take out a sharp pencil, a #2 is my favorite, and go through your first budget and cut out everything that isn’t absolutely necessary. Like a salary for you until the company is making money. Research by INC. Magazine shows that most successful entrepreneurs work a full or part-time job while starting their new business.
Next, instead of buying new, price out what it will cost you to buy used. Do you really need to own, or can you rent the item as you need it? Or lease? Or can you make do with something else? Unless you’re setting up a business where you need to impress people with your affluence and success, set up an office in your back bedroom, or even the trunk of your car. Cut, cut, cut then cut some more.
Keep in mind that the job of a business owner is to “buy cheap and sell dear.” i.e., spend as little as you must to make as much as possible. This is especially true when you’re thinking of starting a business. Every penny you put into the business is precious. For the first few months you’ll be spending money but will have little if any coming in.
Once you’ve created a bare-bones start-up budget, chances are good that you won’t see the need for outside financing. After all, smart, successful entrepreneurs use as little (outside) money as possible for their start-ups. They know most start-ups are self-financed.
That’s right. Start-up businesses are always self-financed. Even in those rare cases where outside money is available, you are going to have to put money out of your own pocket to get started.
Next, create some working financials:
A balance sheet,
projected cash-flow (money in, money out) for your first three to five years of operation,
and a budget of monthly operating costs.
If you don't know what these are, you have no business starting a business. Go to your local community college and take some classes. Learn how to create and read financial statements, learn before you do one more thing. Lack of financial management skills is the cause of one half of all small business bankrupcies according to the old Dun and Bradstreet Business Failure reports. This is one of two skills you must have. Period.
Sure, much of your start-up budget and financials will be best guesstimates, but you will continue to add data as you go through the start up process. For hard number, you can get sample budget for businesses in most industries from books like "how to start a dog-grooming parlor", from industry associations and so on. Most Service Corps of Retired Executive(SCORE) office have reference libraries you can access on site, and may have members with experience in the industry you're considering joining.
How Much It Costs To Start A Business
According to a Small Business Administration report, “Expected Costs of Start-up Ventures”, published in November, 2003, the average business with one owner costs about $6,000 to start, and the average business with two or more owners costs about $20,000.
Where does this money come from a according to this report? Thirty-one percent (31%) of all start-ups are funded through the entrepreneur’s personal credit cards. Other sources mentioned are loans from friends or family, mortgages on property, savings, cashing out retirement accounts, an inheritance, a full or part-time job – in other words, according to research, your start-up money will come from you.
If you decide to pursue outside money, you have two choices. Borrow money or sell equity. If you borrow, borrow as little as possible because the cost of this money comes out of your profits, and most profit margins are thin. Plus, you have to repay this money on a fixed schedule, so if you borrow too much, you cripple your business with excessive debt, another common cause of business bankruptcies according to Dun & Bradstreet.
Who to borrow from? As a rule, banks won’t loan you money until you have three years of financial reports to submit along with proof you don’t need the money. Right now banks large and small are trying to improve their balance sheets so loaning money for any but the most secure purpose just isn't happening.
The second option, selling equity, is something to think through carefully – because investors want a say in how you run things, as well as a proportionate share of any profits.
The two primary sources of equity financing are “angels” and venture capitalists. An angel is a private individual who invests in selected businesses. Venture capitalists are firms that do the same thing for even more carefully selected businesses. While an angel might be your Uncle or Aunt, venture capital firms are businesses and are run as such.
Whether you borrow or sell equity, remember, both the lender and the investor do it to make money off your idea and hard work.
Finally, you need to know what the costs of a prospective business are before you start so you can make an intelligent go or no go decision.
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