Every entrepreneur or business owner would agree that finance is among the toughest element of starting a business. From getting the capital you need to sustain the business needs, every phase is crucial for shaping its financial future. If you’re looking to self-fund your very first business, you have the freedom to leverage your financial resources for support.
Self-funding, also known as bootstrapping, gives an individual total control over his or her own business. At the same time, the future business owner will also take on every risk that may come. Fret not, because many of the small business owners started with self-funding. If executed carefully and properly, you can expect steady funding for your new business.
Let’s now explore the most important financial steps that entrepreneurs should take when opening their own business.
1. Calculate startup costs
Among the biggest expenses you’ll face in growing your business are the startup costs. On average, entrepreneurs will spend around $30,000 to open a new business. Through this can drastically vary depending on the business type and the geographic location. For instance, a traditional street-side business typically has a higher startup cost than an e-commerce shop, requiring tons of certifications and licenses to set up. Startup costs can include expenses such as accounting and legal fees, salaries, mortgage down payments, advertising, business filing fees, website development, and so on.
2. Get your credit in order
Another vital thing to keep in mind is that while you can borrow money under the business name, your personal credit will still be evaluated for the loan. In other words, your own credit will still be the deciding factor for the bank to check your eligibility for the loan and even the interest rate. To ensure you’ll get approved, be sure to focus on building up a good credit score as early as you can. Other things you can do to increase your chances of loan approval are to pay off as much debt as you can and take stock of your assets.
3. Separate personal and business finances
Next, make sure to separate your personal finances from the business. Tracking and assessing expenses can be a total nightmare if you have them all in one piece of plastic. The first step is to apply for an Employer Identification Number and decide on your business entity type. After that, you can then acquire a bank account and credit card for your business to separate the expenses. Doing so won’t just make expense tracking easier, but also the tax time itself. Other amazing benefits to expect include building business credit, protecting personal assets, and claiming valuable tax deductions.
4. Acquire the right insurance
Choosing the right coverage for your new business can be complicated, but it can literally save you from tons of huge expenses. In other words, the right insurance acts as a safety net for your business, protective the money and time you’ve invested in it. There is insurance that will protect your business from losses caused by crimes like employee fraud and theft. There’s automobile insurance that protects your business vehicles against unexpected damages. And then there’s liability insurance that protects your company against lawsuits.
It will be better if you can acquire multiple quotes from various insurance providers to better assess what type of coverage you should prioritize, as well as the limits and deductibles you require. And while most providers may seem to have similar policy names in their offerings, the coverage is different. Compare the details and decide which best suits your business needs.
5. Build an emergency fund
If you think an emergency fund is just for personal needs, you’re absolutely wrong. Entrepreneurs or business owners, more than anyone else, need to build an emergency fund. The current pandemic has already been a wake-up call for nearly all types of businesses. Prepare for unexpected expenses and future calamities without relying on loan programs by starting an emergency fund.
Even if you just opened your business, it’s best to set even a little portion of your monthly revenue for the fund. Another approach to consider is acquiring a business line of credit. You can use it to restock your inventory or pay for immediate equipment repairs. You can instantly access your credit line once you repay the borrowed money. By building a healthy stockpile of cash, you are prepared for all types of cash flow problems that could potentially put your business at great risk.
Self-funding your own small business can be challenging at first. However, with early preparations and smart planning, you can be financially ready to get everything in order. It’s best to seek the help of a professional financial advisor for further assistance.