The Money It Takes to Start a New Business

6848823919_724f516a05

When you start reading about the options you have to start a new business, you’ll almost certainly come across discussions of what it takes to get a business loan — particularly if you approach the whole thing from a broad level.

But that mindset is fairly dated. There are still plenty of people who need money to launch a new business — some in sufficient quantity that it makes sense to ask a bank for a loan. But the cost of starting a new business keeps going down. There are ways to start a business with no cash investment, putting only time and knowledge into building the business. Even for business ideas that require some starting capital, the amount needed is often less than a bank is equipped to loan out a small business founder.

The Cost of a Bank Loan

Getting a bank to cover the costs of starting your new venture requires playing by the bank’s rules. Obviously, a bank is only going to give a small business loan to someone who the bank expects can actually get a new company to the stage where it can pay back the loan, with interest. That doesn’t necessarily exclude people who haven’t started businesses before, but it does mean that it’s a lot harder to get a loan for an idea that no one has ever considered before. New is risky; a banker can’t guess how it will play out.

To get the loan, you have to have a business plan that meets the expectations of your bank’s loan officer. Not all ideas fit that bill; it’s likely that you’ll have wedge a big idea into that tiny framework to get it to pass inspection. And once you’ve got the loan, you’ve got to continue to follow that framework — there’s not a lot of room for dramatic changes.

You can’t afford to take risks when you’ve taken a loan, either: the one big risk the bank will allow you is to start your own business in the first place. From there, you have to take the safe path, to ensure that you can make your scheduled payments back to the bank.

There are plenty of business ideas for which these constraints are not a problem. The availability of small business loans during tough economic times may contract, but a bank can still make enough money in the process that they’ll continue to make them. But if you have an idea for a business that doesn’t fit into that tight little box that a bank requires, then why would you ever consider that option?

Money is Everywhere — If You Even Need It

Not all advice on founding a new company has caught up with the reality of the modern world. There are software programs that can file incorporation documents for a fraction of the cost of a lawyer. There are virtual assistants around the globe who will work only the hours you need, without the requirement that you go through the whole employment process. There are coworking spaces that will rent you a desk and access to a conference room for next to nothing, at least compared to the price of renting your own office space.

The actual cost of starting a business is minimal, at least compared to the days when everything had to be done by hand. When a small business guru discusses the need for startup capital, they’re thinking about specialized equipment or building up inventory. For those expenses, you may still need some money in the bank. But even then, there might be ways to get started with minimal expenses and grow into buying your own equipment or inventory. You might be able to just rent time on specialized equipment in order to complete your work or arrange for a manufacturer to ship a product directly to a customer when you get an order.

The bottom line is that you’ll likely need less money than you might think to just get started with your business. There are plenty of sources for that sort of startup capital:

  • rely on your savings
  • freelance or consult part time to fund the actual business
  • borrow from your friends and family
  • borrow from microlenders
  • get an angel investor

Each of these strategies requires an awesome idea, preferably one that you can turn to profitability quickly. But they are out there and they provide a lot more flexibility than a bank loan.

The Real Financial Pinch for Modern Businesses

All this is not to say that you won’t need a bank loan or an investment over the life of your business. You probably don’t need nearly as much money as you might expect to get started, but you will need plenty of cash to grow.

Consider the startup model: two people can lock themselves in an apartment for six months and come out with a pretty decent product. The cost is rent for six months, utilities, and a whole bunch of ramen. It can easily be done for $10,000. The two founders may even be able to take an app or other product to break even at that point. But growing it much bigger can be a very different matter.

To build a big customer base, they’ll need marketing help. To keep that customer base, they’ll need a customer support team and to keep improving the product. They’ll need accounting and human resources departments to manage the marketers, developers and customer service reps. The costs add up very quickly. Startups have a mechanism to handle this sort of growth, though: it’s relatively easy to get millions of dollars to make the leap from the initial business model to something bigger through the venture capital system.

For most other businesses, though, we’re still relying on bank loans. There are some banks that offer really great financing options for business growth, though the costs of taking any bank loan often remain the same. There are also investors who are willing to make deals with less technology-oriented companies.

It’s true that there aren’t as many opportunities for getting financial help for growing a business as starting one, but since you actually need to get your business to that point before financing growth is a problem, that’s okay. If you haven’t started your own business yet just due to the question of money, it’s time to revisit that question. There may be opportunities out there that you’ve never dreamed of.

Leave a Comment

Previous post:

Next post: