How much money do you need to start a business?
Courtesy / Marshall Communications
Ann Leamon, left, and Nancy Marshall
People start companies for many reasons — a driving desire to fill a hole in the market, a skill that people will pay for, an opportunity that suddenly presents itself or even the loss of a job and the need to continue generating income to support the family.
Stories of successful entrepreneurs — Bill Gates, Steve Jobs, Martha Stewart, Roxanne Quimby — make it look easy. But for the entrepreneurs we know, it has never been easy.
We’re not saying not to do it, but to be aware that you may need more money than expected to get your operation off the ground.
Startup money
It’s annoyingly circular that to start a company to make money, you need money. Sure, someone started an antique shop with a quarter in her pocket, but that is an exception to the rule.
At the very least, you need an email address, a website (with a web address or a URL), a post office box, a business checking account, and a business structure (sole proprietorship, LLC, S-Corp, C-Corp). For a physical business, you need a location, a sign, some advertising, and at least one employee (yourself).
Unless you have a trust fund to finance the business, you’ll need to hit your savings or a business loan to support your fledgling operation, buy inventory, advertise and rent space or at least consult with an accountant and an attorney on how to get started.
How much you need and how you’ll get will depend on what your business does. There are resources available here in Maine, such as SCORE, that offer free consulting services to startups.
Several sources, including the U.S. Small Business Administration and SCORE, say launching a business costs $40,000 on average for the first year, but there are wide variations depending on the industry, location and type of business.
Small first steps
Ann’s business was a consulting firm that took over her senior partner’s existing projects and had a positive cash flow from the start. After 18 months, they needed office space and she confronted the reality of furnishing an office.
Apart from two purple sofas, which might have come from a frat house, and an abandoned plant, the place was empty. For several days, she and her two employees perched on the sofas with their laptops on their knees — hardly ergonomic accommodations. This was not a crisis thanks to the existing cash flow, but it could have been.
Nancy started her business in a spare room in her A-frame house at Sugarloaf, where she was providing PR services to businesses in the outdoor industry as a solo entrepreneur. She had to buy a desk and a computer to get started which at the time, cost about $5,000.
Unlike Ann and Nancy’s companies, many others need major investments just to open the doors. There are lots of financing options with varying costs. When considering these, it’s important to understand what you’ll use the money for and where your company lies on its growth journey.
Even unprofitable companies can obtain debt financing, usually by accessing money that they have already earned — invoices for delivered products/services that have not yet been paid, through methods called factoring or receivables-based financing.
As your company grows, it moves from the most expensive sources of funding, like factoring, to the least expensive, like a line of credit or a conventional term loan. There are other options: silent partners may provide funding in exchange for a share of the profits or, like Ann’s brother, a second mortgage.
Sometimes, a friend or a relative will invest in your company, although it’s wise to have an established agreement about paying back the debt. Check with the Maine Center for Entrepreneurs, the Small Business Administration and your town’s local economic development committee for additional funding methods.
Worth the effort
This is just the beginning of your entrepreneurship journey, and where there’s a will, there’s a way.
After struggling to be profitable for the first eight or nine years, Nancy joined a national network of PR and advertising agency owners that helped her immensely with guidelines for pricing, billing, and paying employees. For Ann, an executive coach was extremely helpful.
It wasn’t easy for either Ann or Nancy, but it was definitely worth it in the long run for the sense of satisfaction and the ability to be the captains of our own ships.
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