Funding your startup

A million dollar business idea is useless if it remains written on a napkin. Learn the best ways of securing funding to build your dream.

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You're going to need some capital to get your business off the ground. Here are the top options for financing your business idea

Once you've got a great business idea and you've written out a plan, you're going to need some funds to get started. How much you need will depend on the type of business you're launching. 

Fortunately, there are a lot of different funding options to help you build your empire. But first things first: let's figure out how much capital you'll need to get yourself started.

Figuring out how much capital you need

As we mentioned before, the amount of capital you need is going to depend on the type of business you're launching. Regardless of your business, though, your startup costs are going to fall into three main categories.

Business expenses

Your business expenses are your costs you'll incur to operate your business. To start your business, this could include things like marketing materials, legal fees, any fees involved in registering your business (the average cost in the US is $800–1,000 USD), website costs, salaries and office rent. The good news is these expenses are tax deductible. The bad news is you'll still need a chunk of change to get started.

Business assets

Your business assets are going to cost you money as well, but they're tangible items of value that your business owns. This could include inventory, office furniture, equipment and vehicles.

Cash reserve

Cash technically falls under business assets, but it's important to spend some time on this subject. It's crucial to figure out how much cash you'll need on hand.

Your cash on hand, or cash reserve, is money you actually have sitting in your bank account. Its purpose is to help see your business through tough times.

Figuring out your cash reserve is pretty simple. Just look at your projected monthly expenditures and multiply this by the number of months you want to have cash in reserve for. In other words, in the worst case scenario that your business goes through a period of no revenue, how many months' cushion do you want?

Most experts recommend a cash reserve of between three and six months' expenditure. It can be tempting to keep a large cash reserve, but just remember that every dollar you tie up in cash is a dollar you can't use to grow and expand your business. You need to find a figure that strikes a balance between providing security and giving you room to invest in your business.

Once you've figured out your startup expenses, startup assets and cash reserve, add these figures together and you've got the amount you'll need in startup capital. Go ahead and add 10% to this figure to give yourself a bit of a cushion in the very likely event that some costs are more than anticipated.

What you'll need to get started

Now that you have a good idea of how much capital you'll need, you're probably eager to start raising money. But before you jump into securing that sweet, sweet cash, there are a couple other details to get in order. After all, anyone investing in your business is going to want to know that you have a well thought out plan.

Business plan

Hopefully you read our previous chapter on how to write a business plan. If you didn't, though, here's a brief summary of what a business plan entails:

Value proposition: This is a summary of the solution you're providing to customers, and what makes your solution unique.

Market research: Your market research should detail demand for your solution and your ideal customer demographic. It should identify the market you'll be operating in and the opportunities in that market.

Funding: This is a summary of the funds you'll require to get started and how you plan to use those funds.

Milestones: This identifies the major milestones your business plans on hitting, and an estimate of when you'll hit them.

Resourcing: Your human resourcing should identify what roles you need to fill and profiles of the sort of staff you'll need.

This is just a synopsis, and your business plan should go into detail on each of these points. If you haven't read our chapter on writing a business plan, you should really go back and read it now.

5-year financial projections

Any investors you approach are going to want to see financial projections for at least the first three years of your business, and some may want to see up to five years. You should break your projections down month-by-month for the first year and then by quarter for the following years.

Your financial projection will take into account your expected sales minus your expenses. Be sure to be specific, showing how you're pricing your product or service, the number of sales you're projecting for each month or quarter and itemizing your expenses in detail.

Creating financial projections for a company that hasn't even launched can be tricky. This is where some in-depth research is required. You need to examine the industry you'll be working in and determine demand based on competitors. It could be a good idea to get the advice of an accountant who's worked in your industry.

Your projections shouldn't be unrealistic, but they also shouldn't be overly conservative. Remember you're trying to attract investors. You want to present them with an attractive projection.

Once you have a detailed business plan and financial projections, you can start approaching investors. But what kind of investors should you approach, and do you even need outside investment? Here are your options: