Smart: Basic Financial Planning
for Small Business Owners
hasn't thought of owning their own business at some point in their
lives? Being your own boss, not adhering to someone else's time
clock, and pursuing your passion can sound very appealing. Yet
the reality often falls short of the fantasy. In fact, over 80
percent of all small businesses fold within the first year. There
are numerous reasons for the daunting failure rate, but high among
them is lack of initial financial preparation.
smart. Complete the following basic, yet vital, tasks. Doing so
can improve the odds that your dream business will remain open
for years rather than months.
your business's start-up requirements
There is a lot you will need to do before opening day, but first
among them will be to know precisely what and how much you will
need to get your company up and running. Because each venture
is different, there is no exact item and cost template.
a sheet of paper or computer spreadsheet, list what you think
your company will require just to open your doors. Research the
price of each line item. If you are unable to obtain the exact
price, use a conservative estimate. These expenditures may include:
with public utilities
totaling your expenses, you may come up with a figure that seems
frighteningly large. If so, revisit the list and decide which
are absolutely necessary and which are more discretionary. Eliminate
those you can do without and obtain at a later date.
after trimming expenses, the amount of money you may need may
be beyond the scope of mere savings. That's where loans come in.
But the key is to borrow just the right amount - you do not want
to be deep in debt before you are able to recoup enough to repay
what you owe, or budget yourself so tightly that you are operating
on a restrictive shoestring. Which is why getting the most accurate
picture of what your business's start-up requirements are is so
your overhead costs
Many small business owners greatly underestimate how much it will
cost just to pay for overhead. Think about how much the company's
day-to-day operations will likely be. As you did with the first
step, list all the expenses you feel will be necessary to keep
your doors open. These often include:
other salaries and wages
(inc. social security)
you have a good idea of how much money it will take to keep your
business running, you will be able to gauge how much revenue you
will need to cover these costs - and still make a profit.
your credit reports and make necessary improvements
Long before you fill out the loan applications, obtain copies
of your credit report from the three major credit-reporting agencies
(TransUnion, Experian, and Equifax). Lenders will look to your
credit history (as well as the projected profitability of your
venture) to determine whether or not you are a good credit risk.
Since many reports contain errors or have damage that needs fixing,
the sooner you get them, the sooner you can make the necessary
there is evidence that you have not paid your bills on time, or
that you are already overextended, allow yourself plenty of time
to make changes. Work to decrease your debt and make sure all
of your subsequent payments are made in a timely fashion. A significant,
positive difference can be made in as little as a year.
there is erroneous information on your reports, such as accounts
that are not yours or negative information that should have "aged
off," you will need to start the dispute process as soon
as possible. It can take months to correct errors.
the best and most appropriate financing
There is not one way to finance your business. It is important
to explore all of your options before making a decision.
savings, assets, and gifts: Many people use what they have saved
to finance their business. Assets such as property and investments
may be sold to fund it. You may even be gifted cash that can
go towards the venture. Of course this is money you don't have
to repay, so interest and payments won't be a consideration
(though losing it all if the business fails to thrive may be.)
loans: Family members or friends may be willing to lend you
money, often with low (or even no) interest expected in return.
Be forewarned though - many a personal relationship has suffered
irreparable damage because of such arrangements.
may consider borrowing against your home or your employer sponsored
retirement plan. However by doing so you would be putting your
home and retirement savings in danger, making these very risky
decisions. Some people have even financed their business using
credit cards, though interest rates are usually too high for
this to be a wise choice.
Institutions: The most common way people finance their small
business is by obtaining loans from their bank or credit union.
These financial institutions offer loans with comparatively
low interest rates and generous repayment terms. And if your
credit meets their criteria and your business proposal is sound,
you could be eligible for substantial capital.
Investors and Venture Capital Firms: Angel investors and venture
capital firms specialize in helping new and existing companies
financially. In exchange for lending you money, they usually
ask for equity or partial ownership in the business. However,
if your greatest desire is to be your company's sole decision
maker, this will probably not be the most desirable option.
Small Business Administration: The Small Business Administration
has special loan arrangements with private investment firms.
These loans are licensed and regulated by the SBA. Not only
are the terms for such loans very good, the SBA is an excellent
source of support for most small business owners.
you can see, starting your dream business takes a tremendous amount
of work and effort. But with careful planning, you will gain a
clear vision of how much money it will take to start your venture.
Doing so can save you not just dollars, but anxiety and time in