Starting a business entails having the resources you need to start and operate the business. However, finding money to be used for the business can be a headache-inducing emotional rollercoaster.
There are a number of ways you can raise money for your business, but many of these options do not come easy. You can use every last cent of your personal savings to start the business. You can decide to use a sizeable chunk of your family’s money saved through the years to finance the venture. You may also put your relationships and friendships at risk by borrowing money from friends and family. Or, in order to get money for the business, you may be willing to be in debt up-to-your-eyeballs, maxing out all your credit card bills. If left with no options, you may even be willing to put your own house on the line, drain your 401Ks and insurance, and use other assets to capitalize the venture.
Face the Risks
Whatever method you may choose to raise the capital your business needs, deciding to start a business means embracing all the risks that go with the process – even the possibility of losing every penny you put into the business. It’s a big decision that could potentially affect your financial well-being as well as that of your family. Indeed, the tremendous risks you face when starting a business requires a huge leap of faith.
The question then is: If you are willing to risk so much, how can you ensure that you can at least recoup the money that you have invested? Do you have a solid financial plan in place to help ensure that your business is a success?
Take this lady I interviewed years ago who started an online store selling children’s apparel and development toys. Like many entrepreneurs, she started the business very optimistic, thinking that she can start selling almost immediately. She thought that all she needed was to open the store and customers will come rushing in.
Unfortunately, her first sale came six months after opening the online store! In the meantime, she was paying her hosting fees, ecommerce fees, pay per click advertising and interest charges on the credit cards she used to purchase inventory. She has also spent a huge chunk of her money for the design and setup of her ecommerce store.
She did not plan for the scenario that she would have no revenues for the first six months. With her highly optimistic expectations thrown off the window, she scrambled to keep the business afloat as her resources started to dwindle significantly. It was a very tough and stressful six months for her.
Understand Your Financial Requirements
You don’t want this type of scenario for you. Ken Boyar, author of the book “The Practical Dreamer: Do’s and Don’ts of Mastering a Small Business” suggests asking the following questions to understand better the money requirements of your new business:
- Will I need more or less money to start the company than initially planned?
- If I am going to run out of money, in what month can I expect that to happen?
- If I need to secure a loan, in what month should I apply for that loan in order to have the cash when I need it?
- What amount of income or sales do I need to generate every month in order to cover my basic expenses?
The process of thinking through these questions will improve your insight into the inner financial workings of your company. Understanding how much money you will really need, how much you will earn, when you need to have the money and how you will use the money are critical information you need to know when starting a business. This is especially true if your business is not well capitalized, or you are not getting the amount of revenue you expected the business to generate.
Take the time to understand what you business really needs in terms of capital. Think and plan for possible scenarios, so you will not find yourself scrambling to find more money to continue the business and meet all your financial obligations.
Get excited and be optimistic about starting a business – but keep your expectations realistic.
Also read the article Are You Financially Ready to Start Your Own Business?