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Estimating upfront business costs and getting funding

Figuring out your upfront costs is the biggest step you need to take before you hit the streets in search of funding.

4 min. read

A comprehensive business plan shows you have a viable concept for starting a small business. But before you try to activate that plan, you first need to figure out the upfront costs you’ll have (what you’ll need to spend to get the business going before it turns a profit). Then you’ll have to figure out how to get financing to fund your new operation.

1. Calculate your start-up costs

When estimating your business’s upfront costs, keep in mind the physical assets you need to operate, what expenses you’ll have before opening your business, and how much cash you’ll need on hand when you open to cover day-to-day costs.

  • physical assets: include any buildings and machinery you’ll need to own or lease, furniture and equipment to run day-to-day operations, and any materials required if you’re creating product

  • expenses: include expenses that cover the logistics of opening a business, such as legal and accounting fees for creating a corporation, marketing costs to get the word out about your company, and signage and website design expenses

  • cash-on-hand:plan for enough cash to cover your anticipated costs for the first few months of operation, working with your accountant to figure out how many months to plan for

“Figuring out your upfront costs is the biggest step you need to take before you hit the streets in search of funding.”

2. Gather your financial information

Access to cash is the most important resource for any new venture. After you’ve figured out how much cash you need to open your business, you need to forecast at least three to five years of your business’s income and expenses. This will help you pitch your business plan to potential financing sources. Your projections should include:

  • sales forecast: how much product or service you plan to sell on an annual basis

  • expenses: your operational costs, including costs of goods sold

  • profit and loss: your revenue minus your expenses

  • cash flow: net amount of cash your business will receive (income) and disburse (expenses)

  • balance sheet: list of your company's assets, liabilities and equity

  • business ratios: tools to figure out if you expect your business to do better or worse than an industry average or your competitors; find industry ratios through industry associations, trade magazines, or your bank or accountant

3. Show that financing your small business is worth the risk

When approaching a bank about financing, you need to prove your ability to repay. The following items in your financing plan can help convince lenders:

  • strong personal credit score and borrowing history

  • established relationship with the institution (personal account in good standing order over many years)

  • collateral, which can include real estate, investments and automobiles

  • insurance policy with a face value that can cover the amount of the debt, with the bank listed as irrevocable beneficiary

  • qualification for the Canada Small Business Financing Program (CSBF), in which you personally guarantee up to 25% of the loan and the government guarantees 85% of the outstanding loan in the case of a default

4. Consider types of financing available

Banks will have different borrowing options available, depending on the funding you require. You can choose from:

  • term loan: a lump sum of money for one-time, larger expenses that can be repaid over a specific time period

  • line of credit: a predetermined amount of funds that lets your borrow just the amount your need when you need it; good for for ongoing operating costs or a timely business opportunity

  • credit card: lets you conveniently pay for day-to-day business expenses

Start building business credit

As a new company, you should immediately start building a positive business credit portfolio that’s attractive to future lenders. Here’s how:

  1. Open a business bank account, keeping your personal expenses separate and maintaining a positive balance.

  2. Build credit with the companies you do business with.

  3. Use your line of credit wisely to ensure a positive business credit rating.

  4. File and pay your business taxes on time.

  5. Make sure all your company expenses are paid on or before their due dates. Remember to allow time for electronic and other payments to be processed.

Figuring out your upfront costs is the biggest step you need to take before you hit the streets in search of funding. After you have your start-up amount, you can consider financing options, plan to establish and maintain a good business credit rating, and lead your business toward a successful future.

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