At some point, every entrepreneur who starts a business must determine how much capital they should invest in their dreams. A lack of capital is a commonly sited issue for small business owners, and it can stunt your business’s growth. Entrepreneur reports that 36 percent of small business owners said they could not grow or expand their operations without capital availability, and four percent said it would mean closing their stores or branches. Figuring out how much capital to invest into your business isn’t a simple formula, so here is a look at the things you must consider to figure how much is right for you.
Figuring out how much you need to invest before you even open your business is often the biggest hurdle for aspiring entrepreneurs. Sit down and compile a list of everything that your business will need to have before you open the doors – this includes the mundane day-to-day items, such as chairs and paper, not just the big equipment and supplies. Talk to others in the industry and get an idea of what their start-up costs were like. Often, this part of the process is something that entrepreneurs encounter during the building of a business plan to present to a bank when asking for a loan, but it shouldn’t overlooked as a way to figure out your own personal capital infusion.
Furthermore, many lenders won’t give you a dime if you aren’t willing to invest some of your own money at the start. Lawyers.com reports that lenders often require a minimum investment of 20 percent of the expected cost from anyone seeking a business loan. This is a pretty good benchmark of what you should personally expect to invest.
While the best way to finance your business may come from your personal savings, you should always be careful of the risks that come with personal lending from yourself to your business. For one, lending from a personal credit card comes with high interest rates that can be difficult to pay down quickly. You can borrow from a personal IRA interest-free, but you must replace the funds within 60 days to avoid penalties.
You need to take steps to protect your personal identity when your funds become entangled in a small business. Investing in an identity protection service such as LifeLock is a cost that should be calculated as part of your expenses. When you are opening a business, the joy of becoming your own boss can blindside you to some of the risks, so be sure to have someone watching your back. Calculating the expense of having an accountant is another important cost that is likely going to come from your personal funds when you get started.
Keeping a business running can also require a regular injection of personal capital. Figure out what your monthly expenses will be, in terms of ongoing costs such as rent, utilities, and licenses. You should be wary of covering some continuing expenses personally, such as payroll, but knowing what your continuing expenses will be will help you to figure out exactly what will be required of you every month.
Don’t forget, you’ll need to pay your own bills as well, so figure out what you can afford to invest and give yourself a six month cushion to see your business grow. Plan how much it will cost for you to survive for six months, and then invest a large portion of the difference in your business during the critical starting period and you will see it grow and prosper.