Imagine if you were to quit your job right now to dedicate all your time to your small business startup. Your expenses would stay about the same, but your (and your family’s) immediate income would be initially decrease. The difference between your family’s expenses and the family income is the business burden. Therefore, business start-up costs and the business burden both should be considered so that your living expenses will be covered until your business is running and generating enough money to sustain itself and your personal expenses so that your family’s lifestyle does not change dramatically as you transition from employee to entrepreneur.
Are You Ready?
The City of Dallas Office of Economic Development recommends having 6 months of savings in a bank account prior to dedicating yourself fulltime to your new business. This emergency fund calculator can be used to calculate your current expenses and estimate savings needed to support those approximate living expenses for any number of months into the future.
Financing Your Business
The US Small Business Administration, or SBA, lists 4 common ways that entrepreneurs finance their businesses:
Loans: A business loan is specifically intended for business purposes and involves the creation of a debt which will be repaid with added interest. Entrepreneurs must apply for loans, and applications and forms vary depending on the lending institution. In general, you should be able to answer basic questions about why you are applying for a loan, how would the loan be used, what assets will be purchased by what suppliers, if you have other business debt and which what creditors, who is on your management team as well as personal background information. Review the SBA’s Business Loan Checklist for more details.
Grants: The federal government does NOT provide grants for starting and expanding business. Federal government grants are only available to non-commercial organizations, like non-profits and educational institutions. Government grants are funded by tax dollars and require stick compliance and reporting measures to ensure that money is well spent.
Venture Capital: Investors provide financing to startups, or projects, where there is a substantial element of risk typically a new or expanding business. These investments are generally made as cash in exchange for shares and an active role in the invested company. Investors actively seek to add value to the companies in which they invest and help them grow to achieve a greater return on investment. Angel Investors, according to the SBA, are high net worth individual investors who seek high returns through private investments in start-up companies. For more information on venture capital, angel investors and equity capital visit the SBA’s article, About Venture Capital.
Friends and Family: We all know who these people are in our lives, but there are a 6 key items to consider prior to asking someone you know, love or trust to finance your startup. First, choose someone with solid business skills and who understands the risks and benefits of starting a new business. Second, demonstrate that you have researched your business and planned accordingly. Write your business plan, include market research and work out your potential profitability before you present your idea and ask for money. Third, be realistic with the amount of money needed to achieve specific milestones. Fourth, decide if you want a loan or a share in the business. Fifth, consider a peer-to-peer lending service, P2P. These firms don’t have to provide the loan, but can act as an intermediary between you and the friend or family member who gave you the loan. Lastly, agree on a repayment plan, and treat it as a business agreement that includes your business plan, how the funds will be used, and how to measure progress.
Starting a business takes passion, dedication and creativity. According to the Kauffmann Foundation, the average start-up cost was $30,000. Do not let this number discourage you, as home-based franchises can be started with $1000- $5000, and microbusinesses can be started for less than $3,000. Every business will have its unique costs, and there are organizations interested in helping you understand evaluating your business needs. Please contact the Dallas B.R.A.I.N. or one of our partner organizations dedicated to small business support.
