Do You Know What Financing You Need for Your Small Business?

In order to determine how much financing your small business will need, you should estimate all the costs involved in organizing and setting it up and running your business until you start to generate sufficient income and cash flow to cover your expenses. Once you determine the initial amount you will need, you subtract the amount of your own resources you plan to invest in the business, and the result is the amount of financing you need.

Estimating Costs

Each business is different and has different financing needs during the various stages of its organization, start-up, and operation. Some businesses may have a significant initial investment in property, plant, equipment, tools, supplies, and inventory. In other businesses it may be possible to start with much lower initial costs. What is important is to have as clear an idea as possible of how much you need to start. And although it is not a good idea to go into more debt than necessary, neither will it serve your business if the amount of financing you obtain is not enough to cover your needs.

Start-Up Costs

Depending on the legal structure you decide to use, you can count on incurring certain costs to set up your business. For example, it may be necessary to seek legal or tax advice to initiate your activities. There could be permits or licenses required to operate your business. If you need to lease space for offices, workshops, a warehouse, or some other facilities, you will probably have to pay a deposit and perhaps one or more months of rent in advance. Connecting utilities such as electricity, gas, and water may also mean deposits and installation costs. You will need to pay premiums for the different types of insurance you business needs, and these premiums are paid in advance. Having a clear idea of all these types of organization and start-up costs will help you in determining how much initial financing you will need.

Working Capital Requirements