When you apply for funds to finance your business, the potential investor or lender will ask you three questions: how much do you want, why do you need it, and how do you intend to pay it back.
You must be able to answer these questions straightforwardly, and you can – if you have already determined your current assets and resources. In other words, you have to first “run the numbers.”
This involves three things:
- How much money do you need to start your business?
- How much money do you have on hand?
- How much money do you need to borrow?
This can be stated in a simple formula:
Startup cash needed – Cash in hand = Amount to borrow
Start Up Capital
To determine how much money you’ll need to get your business up and running, you’ll have to estimate all of the costs involved.This includes, basically, two things: 1) funds for initial expenditures, such as leases, licenses, supplies, and so on, and 2) funds for ongoing expenses to keep your business afloat until it is self-sufficient. (See: Determining Startup Costs)
Money in the Bank
The next step is to determine your equity – also known as your net worth – that is, how much cash you can assemble on your own.You determine this by counting the value of all you own, then subtracting what you owe on that value:
Value – Debt = Equity.
You may be surprised at what you have – and perhaps disappointed about what you only think you have. Here are a few ideas:
- Cash Available. These “liquid assets” can come from several sources: savings accounts, checking accounts, certificates of deposit, money market funds, stocks, bonds and mutual funds, even coins jammed into jars or dollars tucked into a tin can.
- Real Estate. The appraised value of real estate you own, less what you may still owe on its mortgage, is your equity in that property. It may be available as a home equity loan or a line of credit. Alternatively, it might be used as security, or collateral, in transacting a commercial loan.
- Credit Cards. The total amount of credit available on all your cards, minus what you owe on those cards, is cash available. But that amount changes as you use and pay-off those cards.
- Retirement Funds. Individual Retirement Accounts (IRAs), 401(k)s, and so on, are considered generally untouchable until retirement. However, in some cases they may be a source of borrowed money. Discuss this with a qualified financial advisor. They might also be cashed in early with penalty.
- Insurance Policies. Some policies have immediate cash value (at lower than face value, unfortunately) or can be borrowed against.
- Vehicles. There’s little equity in a vehicle because sudden damage could render it worthless. But you might consider trading an expensive vehicle for a less expensive one, putting the cash difference into your business fund.
- Valuables & Collectibles. Artwork, jewelry, furs, antiques, etc., have cash value, but only what the current market will bring, not necessarily their appraised value.
There are other sources, too. Friends, coworkers, neighbors and relatives might be willing to “encourage you” with small sums, perhaps for little or no interest. (A good Business Plan will help convince them of your chances for success.)
Money from the Bank
In the best-case scenario, you’ll find that you can “bootstrap” your startup – that is, fund it on your own without a commercial bank loan.But the more realistic goal is to close the financial gap between you and a commercial lender; that is, keep the amount to be borrowed from a lender as low as possible. It emphasizes your commitment to the business, and it decreases the lender’s risk.
More importantly, each dollar you don’t have to borrow increases your equity in your business.