Not every entrepreneur has the luxury of getting millions of dollars in funding from venture capitalists. If you’re trying to get a small startup off the ground without the help of an investor, then you’re probably struggling to scrape together the money needed to scale up and be successful.
But you don’t have to get a second mortgage on your house or tap into your child’s college fund.
By making some simple, yet important choices and sacrifices, you can save up enough money to get your startup launched.
What Will Your Startup Costs Be?
The very first thing you have to do is come to terms with how much money you’ll need. It’s important that you’re realistic here, because underestimating won’t do you any good in the long run.
If you’re unsure how much it costs to launch a business from scratch, don’t worry. There are a couple of things you can do to get a better idea of where things stand. The first is to study the trends and averages from other entrepreneurs. Here are some interesting insights as gathered by Column Five and Intuit for this infographic:
- The vast majority of entrepreneurs (64 percent) get started with less than $10,000. Another 12 percent use between $10,000 and $20,000, while just 24 percent need more money.
- 75 percent of small business owners say they rely on their own personal savings to get started.
- 57 percent of small business owners say they require less than $50,000 in annual revenue to feel “confident” about the long-term health of the company.
- When asked to look back at the first year of their business and rank their biggest regret, 68 percent say they wish they had invested more time in learning about financial management.
Do these numbers surprise you? Today’s entrepreneurs have been brought up in an environment where they’re accustomed to seeing companies attract millions of dollars in funding, so many are surprised when they discover that roughly two out of three new businesses are launched with less than $10,000.
The fact of the matter is that starting out with a small amount of capital actually makes things a lot easier – especially if you’re able to do so without attracting investors. While investors are great in the sense that they provide you with capital that doesn’t have to be paid back dollar for dollar, they also come with baggage. An investor wants to make his money work for him and often pressures the companies in his portfolio to do certain things. There’s nothing wrong with funding from your personal savings and small bank loans here and there.
The second thing you can do to get a better idea of how much capital you’ll need to get your business up and running is take inventory of the potential costs you’ll face and use these figures to come up with a ballpark estimate. Here are a few of the different things to take into account:
- One-time vs. recurring costs. One important concept to understand is the difference between one-time and recurring costs. You have to account for both when starting your business, but the one-time costs obviously go away after the initial startup period. Be sure to differentiate between the two as you calculate.
- Necessary expenses. Which expenses are absolutely necessary? You need to start with these expenses – which include things like materials, inventory, software, etc. – to get an idea of your baseline financial commitment. Then, once you have the necessary expenses, you can start to play around with what it would look like to include some optional expenses.
- Cash flow projections. It’s also important to go ahead and project your cash flow for the first few months. This is really difficult when you don’t have the business up and running yet, but it’s a good exercise and will provide you with some general guidelines. You’d be surprised by how many educated guesses you can make.
By no means is this a comprehensive list of what it’ll take to launch your startup and start producing revenue. However, if you account for these different expenses, you should be able to come up with a reasonable figure that allows you to set a goal and start saving. From there, it’s just a matter of discipline, determination, and sacrifice.
7 Smart Things You Can Do
Once you know how much money you need to get started, you can turn your attention towards saving. Here are some small, yet smart things you can do.
- Develop a Detailed Budget for Personal Spending
The first thing you have to do is get your personal spending under control. Even if you think you’re a savvy shopper and good saver, you’re probably hemorrhaging money in certain areas. The only way to know is to develop a detailed budget where you account for every single dollar that comes in and goes out.
There are lots of different apps and online tools that make budgeting easy, but the Every Dollar app is by far one of the easiest to use. Give it a try and you’ll have a better idea of what your financial picture is like.
- Get Rid of Superfluous Expenses
Once you have all of your expenses in front of you in the form of a concise budget, you’ll immediately identify areas where you can cut back. For example, maybe you’re spending $10 or $15 per day on eating out. By fixing your meals at home, you could easily save $300 to $400 per month. Or maybe you’re spending $175 per month on a cable contract that you don’t really use. Switching to Netflix or a streaming service could save you $150 or more.
Little expenses like these may not seem like a lot, but what if you could save $1,000 per month? In six months, you’d have an additional $6,000 for your startup. Not bad, huh?
- Eliminate High Interest Debt
Do you have any personal debt on your books? If so, it’s important that you start eliminating high interest loans as soon as possible. This includes credit card debt, car loans, and personal loans. (Though you should also be paying down student loans and mortgage debt as much as possible.) Getting rid of these expenses will save you a tremendous amount of money that can be reallocated to the business.
- Secure a Competitive Loan
Sometimes it’s just not possible to make enough room in your budget to totally cash flow your startup expenses – and that’s fine. The key here is to avoid putting yourself in a compromising position that will bite you down the road.
If you want to look into some financing options to complement the contributions from your personal savings, make sure you know where to look for the best business loans. Your local bank isn’t always the best option these days. There are lots of good online lenders that offer more competitive rates and terms – with the added convenience of a quick application and approval process.
- Avoid “Sexy” Expenditures
Remember how we discussed the difference between necessary and optional expenses? When you finally get your business going, it’s easy to fall for the illusion that “sexy” expenditures are necessary. But here’s the thing: Do you really need to spend thousands of dollars on a logo design, brand new electronic devices, new desks and chairs, etc.? Try to focus on the bare minimum, even when the optional expenses seem more attractive in the moment.
- Keep Your Day Job
There’s something to be said for going all in on your startup and never looking back, but it’s not smart to quit your day job when self-funding your company. Unless you start bring in some revenue very quickly, where will the money come from? Keep your day job until you’re revenues are covering your expenses. At that point, you can reevaluate.
- Run the Business From Home
In the vast majority of cases, there’s no reason for a startup to go out and purchase expensive real estate or get locked into a lease right at launch. Thanks to the array of online tools and automated programs available to you, it’s probably possible for you to run your business out of your house for a few months or years. This will save you tons of money and allow you to pour all of your resources into core tasks like production and sales.
Don’t Buckle Under Pressure
Launching a startup and growing it into a successful business isn’t as simple as it might seem. There will be some fun and excitement, but there will also be plenty of moments where you sink into your bed at the end of a long day and wonder what you’re doing. The key is to not let the pressure get to you and to keep on pushing. So long as you have a strong financial foundation, things have a way of working out.