What do you do when you have a great idea for a new business but don’t have any working capital to use to get things off the ground? It’s a difficult question to answer, but the truth is that it largely depends on what type of business you plan to start.
Some businesses will require large investments of startup capital in order to get up and running, while others might simply require a personal computer and an Internet connection.
Obviously, when you’re starting with limited funds, it can be practical to select a business type that requires a lighter investment, but your dreams might pull you in a different direction.
Fortunately, you can make a great deal of headway in planning your business before it becomes necessary to start spending money. When done right, your business planning can help you determine how to start your business when you have limited money available.
The first thing to do is build out your business idea. Will you be an online-only business, or will you require a brick-and-mortar location? Will you be manufacturing products, or will you provide a service? Will you be a one-person operation, or will you need to hire employees or contractors (and at what point)?
At this stage, you want to develop a clear picture of what your new business will look like. Come up with a brand name and rough-sketch your logo. Identify how many team members you’ll need and what their roles will be. Think about who your ideal customers are and how you’ll reach them.
This step is more about the excitement of developing the foundational ideas of your business and gauging their feasibility. Don’t worry about money or funding just yet; instead, try to get all of your ideas into writing and answer the following questions:
What problem does your business solve for customers?
What are the demographics of your target customers?
Who are your competitors, and what will make your business different?
How will customers learn about you or find you?
What makes you passionate about this business idea?
Now that you’ve explored your business idea and have a conceptual skeleton, it’s time to flesh things out and create an actual business plan. While you won’t need to spend any money at this stage, by the time you’ve finished your business plan, you should have a fair idea of how much money you’ll need along the way and at what points you’ll need the funding.
While step one was mostly about getting your ideas out, step two is all about the details. You’ll need to identify any equipment or inventory required to get your new business up and running, and then determine how much that will cost. Similarly, you’ll need to identify any other potential expenses, such as permits, licenses, employees, rent, and marketing.
You’ll also need to develop cashflow and income projections. When do you think you’ll start making sales? How will you ramp that up? What’s a realistic timeline?
Employees are another topic that will require some serious consideration. If your business is going to need team members, you’ll need to research what a competitive rate in your area for the required education level and skillset would be. Make certain that you also factor in the cost of employment taxes for your state, workers compensation insurance, and benefits like health insurance.
Once you’ve completed your business plan, you’ll have a good idea of what your business is going to cost to get operational. This might be a surprisingly low number if you settled on an online business model that doesn’t require inventory, such as freelance writing or consulting. However, you might also have arrived at a rather intimidating number if your business will require a physical location, inventory, and a number of employees.
While you might not have the money you need to start your business just yet, you do know from your projections how much money you can expect to bring in and how those numbers will increase. Likewise with your business costs and expenses.
The next step is to take your projections and develop a monthly budget. Once that’s done, you can turn to the question of funding and where it will come from.
Your business budget will take your estimated expenditures and projected income and turn them into a clear picture of what you’ll spend money on each month, when you’ll spend it, and how much money (profit) you’ll have left once all the bills are paid. This will give you a solid idea of what your cashflow will look like and whether you’ll need to pursue additional funding options, such as business loans, grants, or credit cards.
Simply create a spreadsheet that lists out all of your expected monthly expenses and their amounts. Be sure to include your payroll expenses, taxes, utilities, rent, marketing expenses, and costs of goods and services.
Then add up all the expected monthly income your business should bring in. Be sure to account for seasonal variation (depending on what industry or niche you’re in) and any promotional sales or specials you expect to run throughout the year.
From here, you can subtract your expenses from your income and arrive at how much profit you expect your new business to make on a monthly basis.
Once you’ve created your business budget, the final number you get from subtracting your total expenses from your total income will be either positive or negative. Online-only businesses and service providers who don’t require a large amount of special equipment or a physical location are the business types most likely to have a positive number at the end of the budgeting process without the assistance of additional third-party funding.
If your startup is going to require a physical location, employees, or large amounts of inventory or equipment, odds are that your budgeting calculations left you with a negative number.
If your current personal finances can’t support the additional funds your business needs, it doesn’t mean that you should give up on your startup dreams. It does, however, likely mean that you’ll need to secure additional funding from a third party. While this could take the form of an angel investor or business grant, the surest way to acquire the additional funding you need is to secure some form of credit line or loan from a bank or financial institution like Hancock Whitney.
To be clear, it can be difficult to secure a business loan as a startup. You will likely need to have either a good personal credit score (at least 680) or two years’ worth of business records showing positive profits.
Of course, as a startup in the planning stages, you won’t yet have the business history. This means that you’ll either need to secure the loan based on your own personal credit history, or modify your business plan to adjust your timeline so that you can begin building your business history now without additional funding and delay the need to secure a business loan until your startup has had time to develop and mature to the point where it will qualify for a loan.
Contact one of our business bankers to learn more about what your funding options are at this stage. A conventional business loan, business credit card, business line of credit, or loan backed by the Small Business Administration (particularly microloans and 7(a) loans) are all options that might be on the table for you.
Once you’ve weighed your expenses against your profits, created a budget, and determined if you need additional funding (and how to get it), it’s time to put your business plan to use and launch your business.
Leading up to your business launch, make sure to get the word out to your prospective customers. The more people are aware of you and the products and services you offer, the more likely you are to start strong with day one business and beyond.
You’ll also want to open a business checking account so that your business has a method of payment to use for all of its bills and purchases. Even a business credit card can’t (or at least shouldn’t) be used for everything. For example, things like rent, mortgage, and loan payments generally can’t be paid with credit cards. It’s also generally considered inadvisable to pay for things like taxes, payroll, and utilities with credit.
For these types of expenses, you’ll want to use your business checking account. Contact Hancock Whitney to learn more about the business checking account options we offer.
There’s a lot that goes into planning and launching any new business. To learn more about options for your specific business and where you’re at on your startup journey, contact a business banker from Hancock Whitney.
We’re invested in our communities and want to see our entrepreneurs and small business owners succeed. If you’re starting a new business with limited funds, we might have the business loan that helps you get your new enterprise up and running.