As an entrepreneur thinking of launching a small to mid-sized business, you may be wondering how much capital is needed to put up the business. The amount of capital you need depends on many factors. The type of business, whether you plan to outsource processes or keep everything in-house and whether your products and/or services will be offered online, from a brick-and-mortar base, or a combination of both are just three things that impact how much money you need.
How much money is enough to get a business off the ground?
While there is not a one-size-fits-all formula to determine how much capital you need to start a business, you can estimate your requirements based on your current or planned business model. Here's what you need to know to get started.
Leveraging expertise and network knowledge
One of the most valuable strategies you can deploy to estimate how much capital is needed to start a business is leveraging resources available to you. For example, you can invest your time getting to know experts in your chosen industry or sector. Join associations, attend conferences and webinars, or take a class at the local community college to gain introductions to professionals and professionals who have knowledge about operational costs related to your nascent business. Someone considering becoming a real estate agent can tap the wealth of knowledge a local broker can offer about everything from estimating operating costs to marketing expenses and tax liabilities.
Other strategies for estimating start-up costs
Along with picking the brains of industry experts, there are a few other strategies you can use to help you get a realistic idea of how much capital you will need to fund the early stages of a new business. For example, there are a number of startup cost calculators on the internet. And, if you use a local bank, you probably have access to a financial counselor who can provide you with a worksheet or other tools to set realistic spending and income goals.
Some people create a mock budget based on current retail and wholesale prices for the supplies, equipment, and inventory they need to offer products and services. Others schedule a meeting with a CPA or business consultant with experience in their industry of choice.
Regardless of which path you choose, do your due diligence. It is better to be fully informed before you launch a business than to discover later that you underestimated your capital needs.
Calculating start-up costs for a small to mid-sized business formula
While there isn't a simple formula that is perfect for everyone, you will need a solid understanding of three accounting terms that impact how much you need to put up a business. First, you'll need to create a list of expected capital expenditures. The class of funds is used to purchase, maintain or upgrade (replace) physical resources. Capital expenditures include things like manufacturing equipment, technology, office buildings, and real estate.
Next, you need to figure out how much money you'll need for operating expenses. This estimation covers items such as office rent, utilities, salaries, and office supplies. Remember, this category does not include costs associated with supplies needed to build your product, only supplies needed to keep your business running day-to-day.
Finally, you'll need to make a list of current assets. Assets are anything of value, owned or under the control of a business. Cash is one example. One way to determine if a resource qualifies as an asset is to ask yourself if an item can be used to provide future economic benefit. As an example, a delivery service uses vehicles to generate revenue. That means a delivery car's value qualifies as an asset. On the other hand, any funds used to purchase a vehicle are classified as capital expenditures.
Sources of capital funding for new business owners
Capital funds to put up a business come from many resources. Many people today use personal savings or a 401K advance. Others ask friends and family to invest in their new endeavors. Below you'll find ten common resources entrepreneurs tap for capital funding support when the first two options don't generate enough start-up cash.
- Angel networks
- Bank loans
- Corporate program
- Credit cards
- Credit union loans
- Crowdfunding campaigns
- Economic incubator scholarships
- Second mortgage or home equity loans
- State, local and federal grants
- Venture capitalists
There is a lot to think about when you're getting ready to launch a business. Figuring out how much capital is needed to put up the business is an excellent first step to begin your journey to success.