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  1. Starting A Small Business: Introduction
  2. Starting A Small Business: Choosing Your Business
  3. Starting A Small Business: Financing Your Business
  4. Starting A Small Business: Business Structures
  5. Starting A Small Business: Making The Leap
  6. Starting A Small Business: Location And Licenses
  7. Starting A Small Business: Hiring Employees
  8. Starting A Small Business: Taxes
  9. Starting A Small Business: Record Keeping
  10. Starting A Small Business: Conclusion

No matter what line of business you go into, you will need startup capital to get your business going. Some typical startup costs facing new business owners include:

  • Electronic equipment: computer, printer, scanner, tablet, smartphone
  • Vehicle
  • Furniture and fixtures: desk, desk chair, lamps, bookshelves
  • Office supplies: printer ink, printer paper
  • Reference books
  • Supplies/inventory
  • Manufacturing machinery and equipment
  • Advertising: domain name, domain hosting, mailers, website design
  • Operating space: home office, coworking space, retail storefront, warehouse
  • Licenses
  • Permits
  • Corporation fees
  • Legal fees
  • Security deposit for renting a business location

What you need to buy can also depend on the degree to which you want to separate your business from your personal life. Many people will use their personal vehicle, cell phone and a room in their home to meet these needs inexpensively. Incorporating to separate your business assets and liabilities from your personal ones also costs money, but it can offer an extra layer of protection if your business fails.

Also consider operating costs that you’ll pay regularly in the course of running your business, like insurance, taxes, membership fees and dues, loan payments and employee wages and benefits.

Sources of Startup Capital

How much money you can afford to risk on your business from your personal savings and how much money you need to open your business will determine whether you need to look elsewhere to raise startup capital. Let’s consider the pros and cons of each potential money source. (See What exactly is a startup?)

Personal Savings

Most business owners use personal savings to help pay for startup costs. You won’t incur any interest expense when you use your own money to finance your business. You also won’t have any creditors to repay, and no one will come after you for money if your business fails or isn’t successful right away.

On the other hand, most people have already earmarked their personal savings for other uses, like retirement and a rainy day fund. Unless you already have plenty of extra money lying around, you might want to start setting aside some of your savings each month to put toward your business. You might also be able to tap your home equity, but it’s a big risk to tie the success of your business up with having a place to live. (Learn more in How HELOCs Can Hurt You.)

Business Loans

Banks provide business loans to finance vehicles, equipment, real estate and other expenses. These loans are generally for a short term, such as five years, but the duration can vary based on the type of financing required. Many loans require collateral — usually the vehicle, equipment or real estate being purchased with the loan, or a blanket lien on other assets. The good news is that a loan secured by collateral usually has a lower interest rate than one that doesn’t. (For related reading, see 4 Steps to Getting a Small Business Loan Without Collateral.)

Expect to pay a loan origination fee and, of course, interest. Business loans can offer the security of a fixed monthly payment and a fixed interest rate, although variable rate loans may also be available. (Not sure what sort of loan you should get? Read Which is better, a fixed or variable rate loan?)

Some banks only offer loans on large amounts; if you need to borrow less than the minimum requirement, seek other financial institutions to provide a more accommodating loan. You might also want to finance your needs with a line of credit. Other options for small business loans include invoice financing, working capital financing, equipment financing and merchant cash advances.

If you plan to seek a bank loan, be prepared to provide a detailed explanation of how much money you need and for what purposes, as well as a detailed explanation of how you will be able to repay the loan. The bank may want to see recent personal income tax returns, bank statements, credit history and other personal financial information.

Small Business Administration Loans

Small Business Administration (SBA) loans are an option if you don’t qualify for a regular business loan.

SBA loans come in several varieties to meet different borrowing needs:

  • 504 loan (Grow loan)
  • 7(a) loan (Advantage loan)
  • Express loan
  • CAPLines loan
  • Disaster loan
  • Export loan
  • Microloan


Because these loans are guaranteed by the government, they can be easier to qualify for than conventional business loans. The graphic above shows the basic requirements. SBA loans also allow you to make lower payments over a longer period. SBA loans are provided through regular banks; the government simply acts as the guarantor. Special SBA loans are available for veterans, active duty military, reservists, National Guard members and the spouses of people in these groups. (Learn more in Expanding Your Small Business With An SBA Loan.)

Credit Cards

You can always use a business and/or personal credit card to pay your business startup costs, assuming you already have or can qualify for a credit card. But be aware that putting business expenses on a business credit card doesn’t mean you’re not personally liable for them. Business credit cards typically require the business owner’s personal guarantee. You’ll have to repay whatever you charge, even if your business doesn’t succeed. (Not familiar with credit cards? Get up to speed with our Credit Card Tutorial.)

Credit card financing can quickly get you in trouble, too. You don’t want to borrow money for your business at a 20% interest rate because the balance will grow each month and it can become difficult to pay off the debt. (To learn more, see The Pros And Cons Of Small Business Credit Cards.)

Sometimes it’s possible to get a card with an introductory interest rate as low as 0% if you have good credit. If you take advantage of an offer like this, make sure you have a plan for paying off the money you borrow before the card’s interest rate goes up, which usually happens within 9 to 21 months. (Learn how the process works in Understanding Credit Card Balance Transfers.)

Business Line of Credit

A business line of credit is similar to a business credit card in that it is an unsecured loan and you can use it as you need it rather than borrowing a lump sum all at once. It can be used to refinance debt as well as to finance working capital, payroll and all the same types of expenses as credit card financing. It is typically designed to be a short-term loan and may have a variable interest rate and an annual fee. (Learn more about your options in Small Business Loan Vs Line of Credit: How They Differ.)

Family and Friends

Are you willing to risk your personal relationships by mingling them with money? Only you know the nature of your relationships with friends and family, and whether any of these people are a viable source of financing. But if your business goes under, would you rather have to explain to a stranger or to your best friend that you’re not sure when you’ll be able to pay them back? Mixing friends and family with finances adds yet another risk to your business endeavor — the risk that you’ll ruin a close relationship.

Nothing can strain a relationship like money. Merely asking for it can be enough to introduce awkwardness into an otherwise sound relationship. If your dad won’t lend you startup capital, you might find yourself thinking, “How can my own father not believe that I have what it takes to succeed?” It’s much easier to be rejected for a loan by someone who doesn’t know you because you’ll know it’s purely a business decision and you won’t take it personally.

That being said, if this idea makes sense given your situation and relationships, consider formalizing the loan using a third party company. Going this route can help make sure expectations are clear on both sides and can facilitate recordkeeping and payment transactions.

Peer-to-Peer Loans

Peer-to-peer loans for small businesses aren’t widely available until you’re established with two years of history and substantial income. However, Lending Club and Prosper both offer personal loans that you can use for any purpose, including starting a business. Prosper will lend you $2,000 to $35,000, and Lending Club makes loans of $1,000 to $40,000. Both charge APRs of about 6% to 36%.

Pursuing venture capital means bringing someone else, generally a stranger, into your business as a partial owner. If retaining total control of your business is important, you shouldn’t consider this financing option. Usually, you will not receive any profit yourself until your investors have profited from your business. Additionally, this type of financing limits the entrepreneur’s upside potential since venture capitalists will often require majority ownership of the business. On the other hand, the lending party also assumes most of the downside risk. (For more insight, read When Your Business Needs Money: Angel Investors.)

How Much Capital Do You Need?

There is no one-size-fits-all method for determining startup capital needs because each business has unique requirements. Basically, you need to make a list of the startup items specific to your business and research each one to determine its cost. It’s important to actually do the research and not just guess, especially if you are doing this for the first time. If you rely on hunches, you may grossly under- or overestimate your expenses. Also, if you’re seeking financing, the lender will not take you seriously if your numbers aren’t realistic and well-researched. (Learn more in The Basics Of Financing A Business.)

When you’re starting a business, it’s easy to get carried away with spending money. First, you may be tempted by the tax deductibility of business expenses. While tax breaks will reduce your costs, they won’t make your purchases free. You’ll still be paying for the bulk of everything yourself, so you shouldn’t buy it if it isn’t necessary. Second, you may be so excited about starting a business that you have trouble differentiating necessary expenses from optional ones. Do you really need a brand-new, solid wood desk, or will that card table in the garage get the job done just as well? Don’t succumb to the tired adage that it takes money to make money. Bootstrap it instead and you’ll be taking a lot less risk financially.

Initially, the most important thing is keeping your business afloat so you can earn a profit. Every purchase you make should be directly related to this goal. Minimizing what you need to buy and how much each item costs will help you meet this goal. Get by on as little startup capital as possible. (Sometimes it’s the small expenses that make or break a great idea. See Business Startup Costs: It’s In The Details.)

Next, we’ll talk about protecting your business by choosing a legal structure and purchasing insurance.

Starting A Small Business: Business Structures
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