The process of opening a small business is already stressful enough without even worrying about how to fund it. But it’s good to start thinking about business costs early in order to know where the money will go.
Sammi Caramela, a Business News Daily contributing writer, said in an article to “be realistic” when considering how much starting a business is going to cost. She mentions that things like office space, legal fees, payroll, business credit cards and other organizational expenses are all things that need to be taken into account before even starting.
Caramela offers five things that prospective business owners should do if they don’t know where to start when it comes to funding their company.
Keep a healthy skepticism
Caramela advises to not invest too much money too quickly. You should have a good level of skepticism to balance the optimism you have going into the process. The best thing to do is to is to “start small” and workshop your idea or product on a very small budget.
“If the test seems successful, then you can start planning your business based on what you learned,” Caramela said.
Don't underestimate expenses
Caramela goes on to note that “according to the U.S. Small Business Administration, most microbusinesses cost around $3,000 to start, while most home-based franchises cost $2,000 to $5,000.”
Obviously, every new business is different and will require different expenses. It’s estimated that a prospective entrepreneur will need about six months’ worth of their starting expenses once they open.
“When planning your costs, don’t underestimate the expenses, and remember that they can rise as the business grows…It’s easy to overlook costs when you’re thinking about the big picture, but you should be more precise when planning for your fixed expenses,” serial entrepreneur Drew Gerber told Caramela.
Don’t let your business fail just because you ran out of money. The excitement of starting a company can cause you to overestimate your revenue and underestimate costs.
Distinguish types of business costs
Caramela offers several examples of the type of costs that perspective business owners should consider.
One-time vs. ongoing costs
One-time costs are those that will only need to be paid once. These mostly occur at the beginning of the process. These expenses included things like incorporating a company and equipment purchases.
Ongoing costs are paid regularly, like utilities.
Essential vs. optional costs
“Essential costs are expenses that are absolutely necessary for the company’s growth and development. Optional purchases should be made only if the budget allows,” Caramela said.
Fixed vs. variable costs
Rent would be an example of a fixed expense because it stays the same from month to month. Variable expanses, however, “depend on the direct sale of products or services.” Expect fixed costs to consume most of the company’s revenue in the beginning. If the company grows and is successful, these fixed costs won’t make or break you.
The Most Common Expenses
Caramela composed a list of expenses new business owners will most likely experience.
- Web hosting and other website costs
- Rental space for an office
- Office furniture
- Basic supplies
- Basic technology
- Insurance, license or permit fees
- Advertising or promotions
- Business plan costs
She also provides examples and estimated costs.
|Basic Office Supplies
Want more information? Here are 14 types of business startup costs to consider when launching your company from NerdWallet.
“Bill Brigham, director of the New York Small Business Development Center in Albany, advises new business owners to project their cash flows for at least the first three months of the business’s life. He said to add up not only fixed costs but also the estimated costs of goods and best- and worst-case revenues,” Caramela said.
If possible, it’s best to not borrow at all when starting a new business. “Borrowing puts a lot of pressure on any business” and it doesn’t allow for very much wiggle room in the finances.
Factor in funding
If you’re going to borrow, here are a few things you can do. “Personal savings, loans from family and friends, government and bank loans and government grants” are all sources of funding that potential business owners can utilize. Camarela said that most companies use a combination of several of these methods for funding.
Though self-funding is the best option, there’s also options like business credit cards and angel investors.
Caramela suggests to check out SCORE for trainings and workshops targeted toward small business owners and aspiring entrepreneurs. They also offer some counseling.
What's the big idea?
Starting a business is stressful in any case but now that you know how much money it’s actually going to take, don’t let lack of money stop you from making that next step and starting your business. Remember, skepticism is good but only if it’s a healthy amount. Now you know it’s an expensive process and the different types of funding you will need, but even if you aren’t able to fund it yourself, there are other options out there for you as long as your company is financially able to handle the commitment of borrowing.
This article originally appeared on the University of Houston's The Big Idea. Cory Thaxton, the author of this piece, is the communications coordinator for The Division of Research.