Many unsuccessful businesses are doomed before they open because of unrealistic expectations of immediate sales and skyrocketing profits, but also because of underestimated start-up costs and low cost projections. This section is designed to teach you to be savvy in small business finances so you can accurately predict costs, plan for the future, and have enough money to stay in business.

Estimating Costs

One of the most common mistakes entrepreneurs make is underestimating the costs of their business and creating a financial plan based on low cost projections. Every entrepreneur has different costs associated with his or her business. For example, establishing a home-based business will have little to no cost for acquiring office space; a rental lease will entail low to moderate costs; and building an office will require a high cost. Regardless of your specific needs, every entrepreneur must take two costs into account: start-up costs and recurring costs. Start-up costs are all of the one-time costs required to start your business, such as a security deposit on office space, furniture and equipment purchase, signage, etc. Recurring costs are all of the costs you encounter monthly, such as salary and benefit expenses, insurance fees, monthly rent, etc. The following worksheets are designed to help you estimate your business costs. Although not inclusive, these charts should help you estimate how much capital you will need for the first three to six months of business. Be sure and include any additional costs specific to your company or industry.

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Smart Financial Management

Now that you have estimated both your monthly recurring costs and your one-time start-up costs, it is time to revise and budget. Smart financial management means saving money where you can, but not skimping on necessities. Look at your start-up and recurring costs and determine where you can save money. Equipment, furniture, and decorating are good categories to consider first. Do you need to have new desks, or could high-quality used furniture work just as well? Does everyone need their own printer? Is new carpeting necessary? Also look to your advertising budget to see if you can reduce both start-up and recurring costs. Does your initial business launch require a full-page ad in the Sunday paper, or would a half-page ad suffice?

New business owners are often so eager to furnish their business to look like the successful establishment they know they can become, that they forget they are still just starting out. Remember that it is ok to save money in the beginning, but make sure you don’t hold back on necessities. Insurance, business licenses and permits, and professionals who can assist you financially and legally are necessary to making sure your business starts out right. If professional fees seem too high, see if you can find professionals offering pro bono services to new business start-ups. Or ask for reduced fees for the first six months. However you plan to save money, be smart about it and don’t be afraid to ask for help.

Start-up Funding Sources

Now that you have determined how much money your start-up will require, you must decide how you will finance your business. There are several different options when looking for start-up funding. Each funding source brings with it a series of pros and cons that should be weighed before approaching any of them. By researching the different types of lenders thoroughly, you should find a lender to meet your start-up needs.

:: Banks

Banks are usually the first place people look when they want to borrow money. Banks offer a variety of loans and can often advise you as to which type of loan would be best for your needs. Some loans, for example, require you to make set payments of both the principal and interest, whereas others require you to pay back only the interest with a lump payment of the entire principal at the end. The obvious advantage of approaching banks for loans is that banks are designed for just that purpose. The downside is that if you have a bad credit history or have accumulated debt, it can be difficult to get approval for a loan at most banks. The best way to determine whether bank loans are appropriate for your needs is to do your research: locate the banks in your region, find out what types of loans they offer, and learn what requirements they have for approving loans. Click here to locate banks in your area through TVC’s Veteran Virtual Business Incubator.

:: Venture Capital Firms:

Venture capital firms invest in small companies in return for equity. They look for companies with the potential for high-growth and high-profitability. Although some venture capitalists will invest in companies that are just beginning, they generally seek to fund companies that have been in business for some amount of time, in order to assess progress, growth, and earned revenues. For that reason, acquiring start-up funding from venture capitalists can be very difficult; also, the earlier the stage of investment, the more equity venture capital firms require. If you are serious about acquiring venture capital funds for your business start-up, look for firms that specifically cater to business in the start-up phase. If you have a thorough, viable business plan, and your management team has extensive experience fostering rapid growth in small businesses and creating substantial profits, you will have a much higher chance of receiving venture capital funding. Click here to locate venture capital firms in your area through TVC’s Veteran Virtual Business Incubator.

:: Angel Investors

Angel investors are individuals who invest their own money in entrepreneurial ventures in return for equity. Angel investors can be persons you know or persons you don’t know, and an also work as an individual or be part of an angel group. Angel investors generally invest smaller amounts of money in companies than do venture capitalists, making them an ideal source for funding when you have exhausted funding from your friends, family, and self, but are not yet ready to approach a venture capital firm. Many angel investors have significant entrepreneurial experience and are motivated by the desire to help young entrepreneurs succeed. They can become valuable mentors, as well as investors, so take advantage of relationships you may develop with angel investors and their networks. Click here to locate angel investors in your area through TVC’s Veteran Virtual Business Incubator.

:: Partners

Oftentimes, funding can be secured by current or potential partners seeking a greater share of the business. The advantages to this form of financing are that partners considering investment are already knowledgeable about the business idea and have confidence in its future, and the approval process may be easier than with a bank or lending firm. The decision you as an entrepreneur must make is whether or not you are willing to give up a portion of your company in order to obtain this funding. Would you be willing to sacrifice some control of your company to gain funding, or would you rather go to banks or other lenders and maintain your control?

:: Friends & Family

Many people warn against the risks of borrowing money from friends and family, but there are also benefits to acquiring loans this way, and it is an extremely popular source of funding for small businesses. Friends and family already know you, your character, and your history of credit, debt, and financial management. The approval process for receiving funding can be infinitely easier, but even friends and family considering making a loan should ask to see a business plan to make sure it is well thought out. The terms on which you must pay back loans from friends and family will likely be more relaxed, and they may not demand interest on the repayment of the loan. The obvious downside to borrowing from friends and family, of course, is the potential inability to repay the loan, damaging not only your finances but their finances and the relationships you share with those individuals.

:: Self-Financing

Self-financing is the most popular form of financing for small business owners, and it can serve to be extremely advantageous when you approach other lenders. By investing your own money and assets into your business, it demonstrates your faith that your business will succeed. Different forms of self-financing include borrowing against your retirement fund, taking out personal lines of credit, and utilizing a home equity loan. The obvious disadvantage to financing your business through one of these personal funding sources is that if your business flounders and you are unable to repay the money, you can lose a lot more than your business. Before putting your home on the line for your business or risking your personal credit history, carefully consider whether self-financing is the right option for you.

Access to Capital Through TVC

TVC Whether you are looking for loans, lines of credit, or banks in your region, TVC can help you get the capital your business needs. Click here to find out what financial resources are available to you as a TVC member!

To find financial resources in your area or learn more about smart financial planning, check out TVC’s Veteran Virtual Business Incubator, a one-stop resource for Veteran entrepreneurs!