The Challenges of Starting a Small Business: Funding Your Start-Up

December 19, 2018

Being able to start a successful small business is something that millions of Americans dream to achieve in their lifetime, especially considering how important small businesses truly are to the United States. With nearly 28 million small businesses powering a significant portion of the United States’ economy, it is no wonder why small businesses are crucial to the United States’ position in terms of world power.

Starting a small business isn’t easy, and there are several challenges that virtually all entrepreneurs have to overcome. Whether it be the challenges involving money or the challenges of effectively marketing their business & product, each challenge is unique in its own way and requires us to explore them individually as we discover ways to overcome them.

Funding Your Start-Up

Money is always a challenge when it comes to, well, pretty much anything! With the majority of most start-ups failing during the setup process being solely due to finances, the challenges of having enough money and knowing how to properly allocate it is definitely a tough one when it comes to building your dream business.

Before jumping right into the game and expecting great results, take it slow and be thorough as you organize your finances and plan an appropriate budget.

Try to Start Small

It’s hard to not have high expectations from your start-up – it’s your business that you created after all! However, not everything will always turn out the way you had originally imagined; thus, you should start out by taking a small risk – especially if you’re a new entrepreneur.

With a smaller budget, it will be easier for you to test what works and what doesn’t. Those who place all of their money in one idea all at once tend to lose it much quicker, ultimately failing completely.

Estimate the Costs

Your costs won’t consist of only the amount it takes to produce and deliver your product or service. You will have to take into account several factors when you begin estimating how much money you’ll need for your business:

Federal/State Fees & Taxes: The amount of fees you will owe to your state will vary depending on which state you’re operating your business in. You will have to pay for patents/trademarks,the fees of creating an LLC and/or incorporation, and mandatory insurances depending on your state’s requirements. On top of all of that, you will have to also pay additional taxes & fees set out by the government as well, of course.
Equipment Costs: Equipment can be the most expensive cost you’ll run into depending on what type of business you’re trying to build. Your general and administrative expenses include equipment, and these costs demand more than just the cost of your machinery needed to produce your product. It also includes things such as computers, vehicles, office furniture, and anything else needed to appropriately operate day to day in your business.
Operation Costs: This cost goes hand in hand with your equipment costs. It will cost you money in utilities to operate your machinery. Your rent will also need to be estimated if you plan on operating your business from outside of your home.
Employees: No one enjoys working for free. You’ll need to estimate how much you will pay for those you hire, how much they will be paid during their training, etc. This can become less of a hassle once your business begins bringing in a positive profit.

With that said, the challenge of estimating the costs for your start-up is clearly a hard one. The United States Small Business Administration estimates that most microbusinesses cost around $3,000, while most home-based franchises cost anywhere from $2,000 ~ $5,000 to start. This will all vary depending on your location, what your niche is, and how skilled you are at efficiently spending money.

Understand the Costs Heading Your Way

You will have various types of costs that you will need to consider as you attempt to startup a business. These costs must be understood in order to ensure that your business will start up successfully and not bring you and those involved in the start-up into debt and ultimately failure.

Fixed vs.Variable Costs: A fixed cost is an expense that you cannot alter such as rent, agreed payments, etc., and are consistent from month to month. A variable expense depends on the direct sale of your product or service and can be adjusted when appropriate during the operation of your business.
One-Time vs. Ongoing Costs: A one-time cost is an expense that will be relevant mostly during your start-up process, such as the cost of incorporating your business or registering your trademark. You will need to know what your one-time costs are, as they will disrupt your income schedule for whatever month they take place in. Preparing for these one-time costs better ensure the security of your business as you will always have the funds necessary to cover them. Ongoing costs are expenses that you pay on a regular basis. The payments you make on your utilities can be an ongoing cost as they typically do not fluctuate as much from month to month.
Essential vs. Optional Costs: Essential costs are expenses that are absolutely necessary for the company’s growth, development, and success. Optional purchases are expenses that should only occur if the budget allows it. This could be upgrading computers despite already having computers that technically do the job you need to be completed.

Project Your Cash Flow

Once you have successfully made sense of all of the expenses that your start-up will require,you will then need to estimate a realistic cash flow. Your cash flow is the amount of cash coming into your business as a result of your transactions. In order to do so, you should add up not only your fixed costs but also the estimated cost of goods, your best-case revenues & your worst-case revenues. You will not be able to cover your costs if you do not have a positive cash flow.

Once established, utilize accounting software programs such as QuickBooks or FreshBooks in order to efficiently keep track of where all of your money is coming from and where it’s going to.

Consider Your Financing Options

The method used to properly finance your business will vary depending on your specific situation. If you have enough money in your personal savings account or enough money from another business you’re involved in, it’s likely that you will use that money to cover the expenses you will run into when first starting your start-up.

However, many throughout the United States are only rich in ideas rather than money. If that is the case for you, you will definitely need to consider your financing options in order to obtain the cash needed to start your business. Two of the most common sources of start-up financing are:

A Small-Business Loan: Whether you take out a loan from the government, the bank, or even a friend – a loan will definitely be able to fund your business as long as you have the appropriate credit necessary in order to qualify for a small-business loan. They provide fast access to cash and can be tailored to your businesses’ financial needs.
Investors: Finding an investor can be tough work. Not only will you have to prove to potential investors that your idea is a great idea, but also that your idea will actually generate profit. Most investors invest with the intent to make a profit on the interest of their investment. Some investments involve a permanent relationship, while others simply end once the initial investment amount and the interest due have been paid off completely.

Additionally, you can consider crowdfunding your business as well. Companies such as Kickstarter and Indiegogo offer platforms that enable entrepreneurs to pitch their business idea and fundraise to start their business. The Kickstarter platform requires that you meet your goal completely in order to collect any funds raised during your campaign, while Indiegogo allows you to collect funds even if you did not meet your initial goal.

These platforms are typically reserved for those who are trying to build a product that has never been seen before or one that has been abandoned by larger companies. Determining whether crowdsourcing is a great source of financing will depend on the type of business you’re trying to start and the amount of money you need.