I manage a microloan program at a non profit. We make microloans to small businesses and startups for up to $50,000. One of the biggest problems I see on a daily basis is that entrepreneurs ask for too much money for their startup. I think it is human nature to try to be conservative, and ask for more funding than you actually need in order to give yourself some cushion, but when you really sit down and run some financial projections you may find that it actually requires very little to start a company these days.
There are 3 points that I want you to consider when you are developing your startup cost projections:
1. You Can Start Slow – I think it is very important to note that you don’t need to start your business on day 1 at 100% capacity. For example, you may have a great recipe for a hamburger, so you decide you want to open a burger shop. The problem is that your startup costs for a new restaurant run up toward $200k. How do you know that people other than your family and friends will like your signature recipe? Before you invest $200k into a full blown restaurant, you should consider some other simple ways to test your product. Maybe you can set up shop at a fair or a conference, or maybe you could invest one tenth of the cost to get a food truck up and running first.
2. Revenue Does Not Start on Day 1 – Believe it or not, you won’t get rich on day one. You might make a killing on your Grand Opening, but you probably put in a few months of work before your Grand Opening. When you think about your startup costs you need to remember that you might need to pay a few months of the following expenses before revenue starts to kick in:
- Lawyer Fees
3. Microlenders Prefer Smaller Loan Requests – Big banks prefer big loans, but microlenders are typically given an incentive to keep their average loan size as small as possible. So it is OK to request a $5,000 loan. You can start your business by testing the market while investing the least amount of time and resources as possible. Here is a link to a list of all of the SBA Microlenders in the US. Many of these microlenders will actually try to help you borrow the least amount of funding as possible to help you get to the next step.
In almost every case, you can get started with less funding than you expected. If you have never attempted to start your own business simply because you don’t have the funding, take another hard look at how much you really need to get started. Start small, and grow big!
You can create a full set of 3 year financial projections on ProjectionHub today.