Having sufficient financial resources to support your business may make the difference between success and failure for your enterprise. It is critical that you realistically analyze the financial needs of your business and the options you have to fill those needs. Few mistakes are more dangerous to a new business than making unrealistic assumptions about finances and financing. A simple analytical process may save both your business and your sanity as your business begins to grow.
Identify Your Needs
You need to identify all potential expenses your business will incur as you establish it. Some of these expenses will be one-time "start-up" costs, such as the cost of filing for incorporation ( if this is the legal structure you choose). Some will be ongoing such as the cost of utilities, inventory and so on. It is critical that you identify those expenses which are essential and those which are "nice to have" but not essential. Identifying these essential expenses establishes your basic financial needs in starting this business.
Analyze Your Ongoing Expenses
In looking at your essential expenses, it can be useful to divide them into two categories: those related to a resource your business will need to operate (often called "fixed expenses" for "overhead") and those related to a specific (projected) sale (generally called "variable" expenses). Examples of the former would be administrative costs, utility costs and insurance costs. Examples of the latter include inventory associated with a particular sale, and travel costs associated with servicing a particular customer. This type of analysis is useful for two reasons: you can use it to determine a break-even point, and your fixed expenses don't go away even when your sales do. You must therefore be able to cover these expenses even if your initial sales are not generated as quickly as you anticipate. This type of analysis is generally accomplished by completing a month-by-month cash flow projection.
Identify Your Financing Options
You have now identified how much you need to invest in your business ("start-up costs") and how much money you will need to generate on a monthly basis for your business to survive. You next must identify the sources of funds available to fill these needs. One of the most important steps in this process is to identify all your financing options - don't cripple your business before it starts because you have planned to use one source of financing and then are unable to access that particular source. Always have a contingency plan.
This is probably the most common type of financing used when starting a business. These resources may be yours, or may be those of friends or relatives. Options in this category include equity in other assets which you personally borrow against or sell, personal savings, or personal loans.
Some businesses finance start-up costs through private investors. This type of financing can take many forms, from a simple partnership to the private or public offering of stock. A competent financial professional, such as a CPA, can advise you concerning the laws regulating these options.
Under certain circumstances, banks and other financial institutions provide financing for start-ups, but they are not the most common source of financing. This is because loans to start-up businesses frequently pose a high risk, and financial institutions are low risk lenders. Financial institutions must maintain a low risk approach to lending because the money they lend belongs to their depositors, not the institution itself.
Venture capitalists invest in your business and become co-owners with you. They will frequently take an active part in the management of your company. They frequently ask for a controlling interest in your business. Venture capitalists look for a high return on their investment (generally several hundred percent) over a relatively short time period (usually three to five years). After this period of time they normally expect their interest in your business to be purchased by you or other investors. Minimum investments vary.
Silicon Valley Community Ventures (SVCV) is a results-driven organization that applies venture capital and business techniques to generate substantial economic benefits in low-income communities in the San Francisco Bay Area. SVCV offers business advising, resources, loans and equity financing to early-stage companies in the target communities of East and South San Jose, East Palo Alto, San Francisco and Oakland.
Bay Area Microloan Program assists women, low-income individuals, minority entrepreneurs, and other small businesses requiring financial assistance. The program focuses on the start-up of new businesses, the expansion of existing businesses, and the creation and retention of jobs. On-line applications are available at http://www.obdc.com
San Jose's Office of Economic Development offers three program designed to serve start ups and non-traditional businesses which may find it difficult to obtain traditional financing. You can contact them at (408) 277-5880.
For assistance in exploring the various financing options available, contact the Silicon Valley - SBDC Office at (408) 736-0680 for a referral to your local Small Business Development Center or consult the California SBDC Network.