Starting your own business can be one of the most exciting times of your life. However, it’s also a process that requires careful consideration and strategic planning. As an entrepreneur, you have a number of decisions to make regarding your new startup, and it’s important to make the right choices from the outset and give your business the best chance for success.
One of the earliest business planning decisions you’ll need to make is solving the question of how you’ll fund your startup business, but answering the question of funding will first require calculating how much starting your new business will cost.
Making this expense calculation will require starting a list or spreadsheet where you note all the costs associated with starting and running your new business. You’ll likely find it’s easiest to break these costs up into different categories:
One-time startup costs
Ongoing fixed costs
Ongoing variable costs
Once you’ve identified the different types of business expenses, you can then fine-tune your startup’s business budget by identifying each line item as one of the following:
Essential costs
Optional costs
After completing this final step, you’ll know how much money you’ll need to get your business started and can begin exploring funding options. As we’ll see later, Hancock Whitney has a variety of funding options available for new businesses, one of which is sure to suit your needs.
While many of your startup costs will be determined by the exact type of business you choose, there are certain initial costs that nearly all businesses have in common:
The exact type of business you launch might also require additional one-time startup costs and impact your ongoing expenses. Roughly speaking, businesses can be divided into three types:
The type of business you start will be the single largest determiner of your startup costs and ongoing expenses. For example, a brick-and-mortar store could require some initial renovation work or the purchase of office equipment, such as desks, chairs, and a printer. A service provider, on the other hand, might need to purchase a work vehicle and tools, while an online business might only need to invest in a well-made website and reliable hosting.
You’ll need to determine exactly what one-time costs your business requires to get off the ground, and then ensure they’re included in your business plan’s budget. If you still have questions on exactly what needs to go into this step, Hancock Whitney’s Small Business Matters program could provide you with the guidance you need.
Once you’ve accounted for your one-time business startup expenses, you’ll then need to determine your ongoing costs. Ongoing business expenses usually occur on either a monthly or annual basis.
Some of these expenses will be clear and easy to determine while other ongoing costs might require that you do a little research and speak to other business owners in your industry to arrive at an accurate estimation.
Ongoing expenses can be broken up into two categories: fixed and variable.
Fixed ongoing costs don’t vary from month to month. Instead, these expenses are the same each time you pay them, making it easy to account for them in your business budget.
Some examples of fixed ongoing business expenses include the following:
Rent
Insurance premiums
Employee payroll (salary, wages, and benefits)
Website hosting
Business loan payments
Variable ongoing costs, on the other hand, vary from month to month depending on use and the terms of your agreement. These business expenses might be minimal some months while consuming a large portion of your business budget in other months.
Some examples of variable ongoing business expenses include the following:
Once you’ve determined all of your initial startup costs and ongoing expenses, you can then re-evaluate all the line items in your business plan’s budget and assign them to one of two categories: essential and optional.
Essential business expenses are the things you must spend money on. Things like rent for a physical store or website costs for an online business are essential because you can’t launch your new business without them.
Meanwhile, optional business expenses are the items in the budget that would be nice to have but that you could get by without. These are things like a television in the breakroom or paying up for a deluxe marketing package when all you really need is the starter package. These optional costs make your business operate more effectively, but you’d still be okay without them.
Once you know what business expenses are essential or optional, you can fine-tune your budget to be closer to a monetary amount you’re comfortable with or that you think you can acquire funding for. Once you’re comfortable with the budget you land on, it could be time to contact a business banker at Hancock Whitney to get the ball rolling on your startup funding.
While evaluating all of your new business’ expenses, you’ll also need to consider if you’ll need to hire employees, and if so, whether those employees should be direct hires or contractors.
Whether full-time or part-time, direct employees are usually more expensive than contractors, hour for hour. In addition to a direct employees’ wages and salaries, your business will also need to consider the cost of employment taxes, training, benefits such as health insurance and paid time off, and sales commissions (if applicable).
Conversely, the cost of contractors will depend on the exact terms of your agreement. Their labor might at first appear to cost a bit more (as contractors typically have more expenses for themselves than direct employees), but they generally don’t carry all of the additional employer-side expenses listed above.
Of course, the question of hiring direct employees versus contractors also involves a number of intangibles such as exclusivity, morale, and commitment to your business, all of which you’ll need to consider when making this decision.
Once you’ve determined what your new business will cost to launch and keep going, you can explore the different funding options and determine which is the best fit:
Bootstrapping: When bootstrapping, an entrepreneur pays for business expenses and startup costs out of their own pocket. This can work when startup costs are minimal, you have a substantial amount in savings, or you intend to maintain a “day job.” The downside to bootstrapping is that it can leave your income and savings stretched incredibly thin.
Conventional Business Loan: Once you have a well-developed business plan and break-even analysis, you can pursue a conventional business loan as your funding option. The exact requirements and qualifications (such as term, interest rate, and collateral) will depend on your specific funding needs and payment capabilities. Hancock Whitney offers a number of business loan products that could be just what your startup is looking for.
SBA Loan: Loans guaranteed by the US Small Business Administration (SBA) are excellent options for small businesses and startups who might not qualify for conventional business loans. Hancock Whitney can help your business acquire the right SBA loan for its needs.
Business Line of Credit or Credit Card: While both of these options are forms of revolving credit, there are important distinctions between the two. A line of credit can be used like cash and can even fund your payroll expenses and lease payments. A credit card, on the other hand, is more frequently used to make smaller day-to-day purchases. Lines of credit tend to have lower interest rates than credit cards, as well. Contact Hancock Whitney to learn more about our options for business credit cards and lines of credit.
Angel Investors and Venture Capital: With the right business plan and presentation, you might persuade an individual investor or venture capital group to provide you with the funding you need to get your business off the ground. The trade-off with this option is that it frequently means providing the investor with an equity stake in your business.
Crowdfunding: In recent years, some entrepreneurs have even turned to crowdfunding as a means to jumpstart their business. This option requires careful consideration, however, as managing a successful crowdfunding campaign can become a full-time job on its own, as you’ll have a large number of backers who will be expecting results and regular communication.
Calculating startup costs and determining how to fund those costs are important steps for any entrepreneur. Here at Hancock Whitney, we’re invested in our local communities and want to see them grow and succeed.
If you need to explore funding options and determine how much it will cost to start your new business, please contact a business banker at Hancock Whitney to learn which of our business funding options could be the best fit for you.