If you’re thinking of starting a new business, it’s important to make sure you’re financially prepared before opening your doors. Here are some tips to help you prepare your finances and get your new business successfully off the ground.
Create a business plan
One of the first steps you’ll want to take in starting a new business is creating a business plan. This will become the foundation of your business.
A business plan describes everything from the company’s goals to its operations. It should provide a preview of where you think the business will go financially during the first three to five years. It will include a company description, products and services, market analysis, marketing and sales, and financial projections. Here are some helpful tips for how to write your business plan.
Having a business plan in place will help guide you through the first steps you take in your new business. It will also become a useful tool when you start to look for financing options.
Make sure your finances are ready
Most new business owners only tend to focus on getting their finances for the business in order, which is understandable. There’s so much to think about from bookkeeping to finding funding options.
But one area that commonly gets neglected is making sure your personal finances are in order too. While it’s important to keep your personal and business finances separate, most new business owners usually end up using some of their personal money to get the business started.
So, it’s to your advantage to take a close look at your personal budget and see where you can make spending cuts. Any extra cash could be helpful seed money in getting your business started.
Also take a look at your personal debt. If you’re dealing with student loan or credit card debt, consider consolidating it for a lower interest rate or a lower monthly payment to give yourself a little more breathing room.
Improving your credit score is another thing you can do before opening your business. When it comes to applying for loans or credit cards for your business, the better your credit score, the better interest rate you’ll get.
Research your funding options
Once you get your personal finances in order, it’s time to take a look at the finances for your new business. All new businesses need some type of financial support to get started, whether you’re self-funding or asking for help. Here are the most common types of funding options for a business.
As previously mentioned, most business owners put forth some of their own personal money to start a business. This money can come from personal savings accounts or family members.
If you don’t have enough money to self-fund your new business, you can look at getting a small business loan through your credit union. You can also look into getting a business credit card or business line of credit. Having a well-crafted business plan can significantly increase your chances of loan approval. Financial underwriters often require a detailed plan that includes your projections and estimated income to evaluate potential profitability of your business.
Finding investors can provide funding for your business in return for ownership shares of the business. Investors could include family members, friends, or other outside sources.
Small Business Grants
Depending on your type of business and your situation, you may qualify for a variety of state, federal and nonprofit grants. The advantage of a small business grant is you don’t have to pay the money back like you do with a loan or line of credit. The U.S. Small Business Administration (SBA) offers small business grants and is a good place to start looking. You can also search for grant opportunities at Grants.gov and USGrants.org.
Crowdfunding is a way of raising money for your business startup. It’s when large numbers of people contribute typically smaller amounts of money to a business idea. The money is usually collected through online platforms like GoFundMe. There are four types of crowdfunding—donation crowdfunding, reward crowdfunding, equity crowdfunding and debt crowdfunding. Here are more details on each type.
Donation crowdfunding—when individuals give donations with nothing expected in return. This is more common for nonprofit businesses.
Reward crowdfunding—when individuals give money in exchange for a reward, usually a product or service offered by your business.
Equity crowdfunding—when individuals’ contributions give them a return on investment and a share of profits in some form. Contributors become part owners of your business.
Debt crowdfunding—when you borrow money from the contributors. You must then pay back the money back to those who gave it to you.
Open a business bank account
Once your business starts bringing in profits, you’ll need a safe and secure place to keep your money. Opening a business savings account and a business checking account is an essential financial move for any new business. It allows your business to start saving and spending.
Business bank accounts function similarly to personal bank accounts; however, business bank accounts offer certain advantages to business owners. Having a business bank account keeps your business money separate from your personal money. This gives you more protection when it comes to your personal finances. Business bank accounts also make it easier for you to give your employees access to paying bills or making purchases if you choose to do so.
Create an emergency fund
When starting out in a new business, it’s challenging to predict just how everything will go. It’s smart to create an emergency fund set aside for cash flow problems that may come up.
For example, if you have a seasonal business like a snow removal company, you’ll have more income during the winter months than the summer months. Having an emergency fund can help out during those slower months. It can also help out when emergency expenses come up like broken equipment that needs to be replaced.
While you may not be able to contribute large amounts to your emergency fund at first, start setting aside what you can. It’s ideal to have at least six months worth of expenses saved up, if you can.
Since you’ll no longer have an employer who supplies health insurance to you, you’ll have to look into options for yourself and any potential employees if you choose to offer such benefits. You’ll also want to look into liability insurance options to cover your business for any potential incidents.
Many challenges come with starting a new business, but if you understand the financial steps it takes to start your business. You’ll be able to start out on the right foot.