If you have a business idea, in most cases you need to have money to realize it. Most things cost money and they should generate you with a profit for these investments. In order to get the business loan or capital, you first need to assess how much money you really need.
Assess how much you really need
First, you figure out how much you really need for setting up the business, expansion or growth. And then, where to spend it on.
Map your personal expenses
At first you assess your personal income needs, by how much you need to make a living, and then estimate the expense for developing your business, then you have a full financial overview of your expected total expenses.
Start by listing your expenses/cost from 1 month (yes, all of them, look at your bank statements/expenses) then multiply by 12 – that’s your yearly personal expenses. You can find more about personal expenses and comparable spending budgets in your area here (Numbeo) which is your cost of living.
Estimate the cost of running the business
Now try, to get an estimate of the cost of running the business with a certain sales revenue. Say, if you sell 100 products with 10$, that’s 1.000$ revenue and you have 800$ cost of doing this (for example the cost is inventory buy, store rent, promotion, labor for selling it, etc.). Maybe you need 800$ in advance to pre-finance your revenue. (Say you need to purchase product in advance).
Now, you have a rough business case from your personal expenses (which is your minimum profit level you need from your business) and your business cost level. This is the minimal profit total you need to make.
As costs go: you can write down a large capital investment in 3 years for starters. (say if you buy machines, or other equipment, etc. ), then after a discussion with your bank/investor/network/accountant, you could make it the cost estimate more realistic.
You could benefit from a financial businessplan template to map out your financial needs and list the expenses, and then check if they are done correctly. At first, your financial calculations will be an rough estimate and later after some research, real life tests and discussions, it will be more realistic and accurate.
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Download here a financial businessplan template to start calculating your business loan needs
Be trustworthy and be prepared
If you prepare better by mapping out your business strategy, writing your financial calculations, researching an documenting the market opportunity and when you are doing your homework, you become more trustworthy.
That means sometimes making a business case more than 5 times. Now, you know how much time it really takes. It also good to have some of your own savings put into the business to really show you are serious about this. This is called skin in the game. This is hard, when you don’t have any money saved. (so start now by saving a bit)
Did you know 65% of the startup money needs come from family, friends and fools?
Did you know that 65% of the startups get their money from family and friends? If you need money for growing your business, first, you could think in your own network and family for getting the money. For most startups, family, friends, relatives are the most common place for to get funding.
However, this can be difficult later, if you can’t pay back the loan, which makes problems for your friends and family. Often the bank has increased barriers not to provide you with the loan, and so it is easier for relatives to provide you with capital. But, for this you need to be equally prepared.
What also helps is first going to the bank manager, ask what they need for input to provide you with the loan, do you homework, go bank to the bank again and provide the necessary details and then ask what they think on it (get feedback). And then, if you still don’t get the bankloan, you still have a sound financial plan, to use for getting a loan from your family network. Or you could try again and go to the next bank.
Ask an experienced enterpreneur in your network
To save you from a bank trip, you could also ask a more experienced enterpreneur to take a direct look at your financial calculations. He or she will certainly have an opinion on this. And even he/she might be enthousiastic and interested in joining your business opportunity, perhaps provide you with a bit of capital to get you started. You might also consider a mentorship in this phase.
How to calculate the value of your business?
Sometimes you need to calculate the value of your business in order to get a business loan (or equity). Multiple ways are available to get an estimate or your potential value of your business. You could start here by using these valuation purposes. Try this for calculate your business value (Equidam). It’s a bit elaborate, but it will help you certainly to get a better feel of your (expected) business value. Be realistic and conservative.
Capital Expenditure (CAPEX) – What will you spend it on?
You first determine how much you need for setting up – most of the expense elements are these:
- Labor: Staffing for developing the solution (labor, think or number of people, price per hour, how many you need per week/monthly, etc.)
- Administrative: Setting up the business (general, administration, legal fees, infrastructure, office, bookkeeping, etc.)
- Technology Development or Product development: Product development cost (the cost to develop your product/service or business offering – list everything from labor, tech, and other resources)
- Marketing & Sales: Promotion & sales (creating marketing materials, mediabuys, advertisting material, hiring a salesforce, etc.)
- Location / Rent: hiring floorspace, or setting up your office.
- Investment on Machines or Production Capacity (like production machines, etc.)
- Inventory Cost: cost of buying inventory (tip: decrease the risk by not owning the gear but instead do it on ‘consignment’ / loan or try to work with: partners who are willing to provide you with a small batch of product for try out purposes)
- Financial Costs: capital costs (reserve, risk, bank loan interests, rents from loans)
Use existing cashflows to finance growth
Can you finance your business from existing cashflows? If you can you are already making money on the business, you could re- use that free cashflow to finance small investments. This way you don’t have to go the banks, and have all the hassle. You save loads of time. But the process in getting capital is relevant, the process of getting capital forces you to take a good and hard look at your business (opportunity). After calculating multiple business cases and creating a nice powerpoint deck, you could approach banks or investors. This helps you getting control of your business.
Off course the banks
You’ll need a sound approach for this. Most of the times it’s hard, but getting a loan should be hard, and it enables you to take a long hard look at your business, which can be good to do. You could go to your existing bank office in the area, and have a meeting with a bank manager. Before this meeting you should have all the numbers available or roughly sketched out.
Ideas – Where to get capital (not from banks)
- Friends & fools / family – most used – rich uncles/aunts
- Micro-Finance Institutions – small business loans providers
- Crowdfunding (try these sites) – peer to peer lending networks
- Government grants & subsidies – paperwork / specialized
- Investors – seed capital (angel investors /seed capital)
- Other enterpreneurs – downside – losing a bit of control of your business
- Own savings – if you put in your own savings, you will be more conscious of running your money (‘skin in the game’)
- Try to get excess money from maybe your current job and then save it for starting the business
- Cashflow to fund growth (small investments)
- Try to minimize capital needs (working on a shoestring) – working with volunteers, free software, and running a business with low startup capital needs – but then you grow slower.
Savings tips and possibilities to get operational with less money
Build frugality and run your business and personal expenses with less money. Here are some tips:
- Not work from a office, but rent first or share with another entrepreneur or try at first with no office. Maybe you could share resources with a partner.
- Not work with staff, but do it yourself (this is time consuming since you don’t delegate, but you’ll spend only your own time)
- Work with free tools (most business software comes with free versions, start with trying out these), later move to paid tools for upgrades
- Remove subscriptions you don’t use. Check your phone bills, rent levels, etc.
- Ask potential customers if/when they will buy from you (or even pay-up front)
- Do you have any ideas ? Leave us a note.
Repayment Capacity
You need to pay back a loan. Showing this ability is very important for all providers of capital. It is hugely important to have a good repayment ability in place. If you can show this together with your financials that you can repay the loan with interest, and really stick to it, the risk for the lender will be lower. And this increases the chance that you can get the loan in the first place and even you might have a lower interest rate on your business loan.
Good luck!
Download a financial businessplan template here to start calculating your business loan level