How to Fund your Business

 

Have lots of great new business ideas but no clue on how to or where to find the funding for them?  You are not alone.  Often people have a great idea for a new business, but no idea how to finance it.  The thought of having to raise money through friends, family or a bank is a daunting task for many and causes them to put their idea on hold.

The reality is the cost of starting a business may take less than many people imagined it to be.  Entrepreneur, in a recent article, listed 101 businesses you can start for under $100.  The types of business range from consulting to being a tutor, to auto detailing, to green cleaning services.  It can be done – I did it! The details of how I funded babyboomercashnow.com is listed below.

If you increase the startup amount to $1000, than there are many more businesses that can be started, as illustrated in 25 business you can start for under $1000.

A key point to remember here is that it is crucial to understand that you first have to get your personal finances in order before launching into your dream business. If your personal finances are not in order, how can you expect your business’ finance will be in order?  It takes the same discipline to manage both successfully.

 

Finance Dos and Don’ts

Additionally, you should not expect to start making money right away in your business. That $100 or $1000 startup cost will quickly balloon into much more.  Before we get to business startup financing, let’s focus on the personal finances’ Do’s and Don’ts.

1. You need to have a personal budget. While it doesn’t necessary mean an Excel spreadsheet tracking every penny, you do need to have a clear idea of how much is coming in and how much you are spending.  Step 1 – balance your checkbook!  Your income should, at a minimum, meet your expenses.  If you are over spending, then additional steps need to be taken before you start your business.

For many years I didn’t have a budget and spent more than the income I earned.  I learned some hard lessons from financial miscues, including a failed business.  I have to put myself on a strict cash spending basis until I learned the discipline to do planned spending. Cash Spending is having actual cash in an envelope and paying everything with that cash. Once that cash is gone, your “budget” is spent.  No more money to buy or pay for anything. This method is a very effective tool to helping one acquire the discipline of “spending within your means”.

2. You need to live within that budget. Hard truth:  if you don’t live within a personal budget, you won’t stay within a business budget.
3. Have credit card debt/balances? Pay them down.  This needs to be done before investing in a business.  If you have more than one credit card, they are likely to have different sized balances and different interest rates.  Common questions on payment of credit card debts/balances are:

• Which cards should I pay down first?
• Should I spread my available cash to pay some to each credit card?
• Should I pay on the card with the biggest balance?
• Should I pay the one with the highest interest rate first?

My suggestion would be to make it simple for yourself, take the card with the lowest balance and pay it off first.  Do this while paying minimal amounts to the other credit cards. The psychological boost and financial confidence you will receive by paying off a card is immeasurable.  Once that card is paid off, cut it up.

Do this for every card.  Pay it off and then cut it up.  Keep one credit card for emergencies and use it only for emergencies.

4. Make sure you save $1000 cash in an emergency fund before starting your new business. That money is not to be touched for any reason except to cover business emergencies. Ideally you would have more than $1000 set aside for this emergency fund, but the $1000 is a good start.  It is recommended you work toward having 3-6 months of salary in liquid savings.  Liquid savings means it is not tied up in CDs or stocks, but it is cash sitting in a bank.
5. Don’t take on any new personal loans. Don’t take on any new debts of any kind.  I repeat, don’t take on any new loans.

Once you have taken these steps you are ready to go to the next step in starting your business.

 

Identify Business Startup Costs

Put together your business plan and estimate costs for the different areas.  I heard an entrepreneur say once concerning business investment, “it will take twice as long and cost twice what you estimated.”  A good note to keep in mind. If possible, you would want to be able to pay cash for your startup costs.

 

How to minimize Start-up costs

If not careful, it is easy to spend a lot of money on startup costs for a new business before you even launch your business.  Here is an approach to help you to stay focused:

1. Itemize the various costs for your business. Examples are needed permits, legal fees, government fees, startup costs for your business to name a few. These are fixed costs or “Must Haves” you have to pay in order to go into business.  Other expenditures can include business logo, business cards, computers, Internet connectivity, storage and the list goes on and on.
2. The other types of costs you will have are the “soft costs” or discretionary costs. Before spending any money in this category, ask yourself a few questions

• How does this purchase move my business forward?
• Is this purchase a must? What happens if I don’t make this purchase?  How does that impact the business?

3. Sleep on any of these “would be nice to haves” purchases. A good example here would be, “do I have two colors or 3 colors on my business cards?”.  A “must have” purchase is are items like legal filing of your LLC or Internet for an online business.
4. Do I have the money in my account to buy the item? If not, delay buying it or don’t buy it at all.

Really think through any monies to be spent.

 

Figure out how to Fund Your Business

When you are starting in a business, not only are you not making money, but it is likely to have a negative cash flow (more goes out than comes in).

You’ll want to figure out ways to divert money to your business from your existing budget, while still enjoying your current lifestyle.  I’m not recommending eating beans every day.

Here is the approach I took in funding BabyBoomerCashNow.com.

 

How I funded the Startup costs of BabyBoomerCashNow

I wanted to “self-fund” the business.  This meant that I would not set up a line item in our personal budget and put $500 dollars in it every month.  I wanted to take money that was already being spent on a regular basis and redirect that money to the business.

 

I identified I have room for creativity in our discretionary money that my wife and I have in our budget. This discretionary amount is money we budgeted for our daily activities, for example:

• Weekly allowance we give ourselves for buying lunch, coffee, dry cleaning, stamps, purchase of any items that aren’t budgeted.
• Train parking (I commute to downtown Chicago each day)

I decided to reallocate that cash to the business.  So I did the following.

1. Instead of spending $3 on a cup of coffee at the local Starbucks for my train ride, I brewed my own coffee at home before leaving for work at a cost of $0.50.
2. When the weather is nice, I would walk the 1.5 miles to the train station. This walk provided exercise and saved the daily train parking fees to put towards my business.
3. My office is business casual so in the summer I wear collared polo shirts and in the fall and winter I wear sweaters. My dry cleaning bill was greatly reduced.  Let me show you the savings.

Item	Daily cost	Annual Counts	Total
Coffee (net cost)	$2.50	240	$600.00
Parking at Train Station	$3.00	120	$360.00
Dry Cleaning	$1.80	120	$216.00
Total			$1,176.00

 

That is almost $1200 in a year!  I simply made a conscious decision to not spend money on coffee and walk to the train.  All it took was a bit of planning and some discipline.

This may not seem like a lot of money that was saved but it paid for:

• Illinois LLC – $500
• 3 Years of Webhosting – $300
• Logo design – $300

 

Wait a Minute, I don’t have any funds that I can redirect. What can I do?

Take a hard look at your budget.  Are you sure your budget is so tight that you can’t squeeze a few dollars out of it each month?

 

Here’s One Other Way to Save Money

Years ago I had cable with Comcast.  It was an analog set up with 75 channels at $20 a month.  I had an old TV, so analog was fine. One day I received a call from Comcast.

Comcast customer service rep (CSR):  “We have great news, we are moving you to digital.”

Me: I’m okay with my current set up.

CSR: You’ll have a digital picture which is much better.  You’ll have 30 channels for only $55 a month.

Me:  My picture is fine and I have 75 channels now.  I’ll stay with what I have.

CSR: We are moving to digital in your area.

Me:  So you telling me that I will get less than 1/2 the channels I have now for 2 ½ times the price?  That’s not an improvement for me.  I’ll stay with my current setup.

CSR:  Sir, we changing to digital in your area.  You don’t have a choice.

I paused for a moment and said, “Actually I do have a choice.  Cancel my service today.

That was back in 2011 and I haven’t had cable since.  (I moved to Netflix).

We can always find “wastes” if we look hard enough at our budget.

 

Actions:

1. Set a personal budget, if you don’t already have one.
2. Pay down debt.
3. Set up an emergency fund.
4. Outline the start-up costs of your business, determine what absolutely has to be spent.
5. Examine your current budget and redirect dollars to a business fund.

 

You can do this when you put your mind to it!

If you come up with other ways to redirect your budget for your business, I would like to hear abou