Save for your business

Looking for that start-up equity injection to get your new business idea off the ground? Many lenders require a 30 percent start-up equity position, as it shows your level of commitment and responsibility to the new venture—traits that also translate favorably to the challenges of running a business. Let's start saving so that you're one-step closer to being your own boss.

How much do I need to save to start a business?

Short answer: It’s considered wise to save at least two years’ business expenses plus two and a half years’ living expenses. Of course, this depends on many variables (type of start-up, replacing primary source of income, partners, etc.), but it is a helpful guideline to get a sense of a final dollar amount.

How do you figure out two-plus years' business and living expenses?

For your living expenses, take a brutal inventory of your spending over the past three months—or if you don’t have the paper trail to follow, keep track of your spending for the next three months. Note every single dollar and be sure to add in annual expenses that may not have occurred last quarter. Now add 10–15 percent to account for any emergencies that may arise while you’re starting your business. Finally, multiply the total by 2.5. Why 2.5? You want to give your business time to establish itself for two years and also give yourself a six-month cushion to find work should everything come crashing down.

To determine your projected business expenses, you must perform a detailed cash-flow analysis that assigns dollar amounts to every cost that goes into setting up and maintaining your new company—and then extend it out for two years. The last thing you want is to invest all your time, money, and effort to get a business off the ground only to close your doors a few months later.

Tips

Tip: Open a separate dedicated savings account

Now that you've figured out how much money you should set aside to start a business, it's time to actually start saving. To make things easier, automate a savings plan. Try to save either a fixed amount or a percentage of each paycheck into a certificate, savings, or money market account.


Tip: Create a budget and slash expenses

It's an oldie but a goodie. Create an exacting budget and stick to it. Then start eliminating monthly costs that add up. Cut the cable. Cancel the memberships. Eat out less and plan meals and grocery shopping trips—all standard items.


Tip: Save without losing your mind

Saving money is tough—and if it doesn't sting a little bit, you're probably not doing it right. That said, you deserve to enjoy your life while you're saving for your startup.

Try to cut out the spending habits you spot, one by one, but remember to still treat yourself once in awhile.


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Borrow money for your business

Borrowing money is the most common source of funding for a small business, but many entrepreneurs don't really understand how financial institutions evaluate their applications. Let's look into types of financing and some chief factors lenders use to analyze you.

What types of financing are available?

When you’re looking for a business loan, the first place to start is to assess your company’s debt-to-equity ratio (i.e., the amount of money you’ve borrowed to the amount of money you have invested). As you might assume, the more money you have invested in your business the easier it is to obtain financing.

There are two types of financing: equity financing and debt financing.

Equity financing (or equity capital) is the money raised by a business through investors who, in exchange for their contributions, receive a share of ownership in the company (shares of stock outright or the right to convert other financial instruments into stock). Naturally, this allows business to obtain funds without incurring debt or monthly payments.

Debt financing, as you may have deduced, means borrowing money that must be repaid over a specific period. Debt financing can be either short term, with full repayment due within a year, or long term, with repayment due over a period greater than one year. The lender does not gain an ownership interest in the business, and debt obligations are typically limited to repaying the loan with interest.

What's "Ability to Repay"

One measurement lenders use to qualify business loans is the “Ability to Repay”. Lenders typically want to see two sources of repayment—cash flow from the business along with a secondary source, such as collateral.

What is some typical collateral?

Collateral can be personal or business assets that can be sold in case the cash generated by the business is not sufficient to repay the loan. The value of the collateral is not based on market value but rather discounted to account for the value drop should the assets need to be quickly liquidated.

Typical collateral includes:

  • House
  • Car
  • Truck and heavy equipment
  • Office equipment
  • Inventory
  • Jewelry
  • Stocks and bonds
  • Mutual funds

How's your credit?

Whether you’re applying for a business or personal loan, one of the first things a lender looks into is your credit history. Looking to increase your business credit score? Check out five tips from score.org.

Borrow

Tip: Stuff you need for a Small Business Loan Application

Here's a great list of all the documentation you need to gather and bring in when you apply for a small business loan.


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Protect your business

Business insurance can give you peace of mind that your venture and all the time and money you've invested are protected. The trick is getting ample coverage for your company while not going broke trying to keep your company secure. Let's break down the liability essentials and what you should only opt for in special circumstances.

What insurance does every business need?

There are several types of insurance that every business needs:

Worker’s compensation: Insurance for injuries on the job that covers medical expenses, lost income, and rehabilitation. While it’s not required, be sure to cover your employees and yourself, something many owners neglect.

Property: Insurance that protects buildings and their contents; however, companies without much invested in inventory or premises can pass on this one.

General liability coverage: Insurance that covers any injury or damage your company may have caused to other people, their reputation, or their property.

Business owner’s policy (BOP): A BOP packages all required coverage a business owner needs (e.g., property, liability, vehicle, crime). A BOP can be customized to fit your company’s needs and typically save owners money. The bundled services often costs less than the total cost of all the individual coverage would.

What about additional coverage—what should I research?

If your business is expanding, there are several types of insurance you may need to look into:

Business interruption insurance: Property and liability only take you so far after disaster strikes. Business interruption insurance can help you rebuild by replacing lost income and covering expenses you incur getting back into the market quickly. Business interruption insurance is usually included within a typical business owner’s policy.

Employment practice liability insurance: Coverage for defense costs and damages related to various employment-related claims, including allegations of wrongful termination, discrimination, workplace harassment, and retaliation deriving from the employer-employee relationship. This coverage is for companies with enough employees to be subject to state or federal civil rights laws.

Home-based business insurance: Homeowners insurance policies generally don’t cover home-based business losses. Sure you may be able to add riders to your homeowners policy to cover normal business risks, but most homeowners’ policies only go so far in covering your home-office, and you may need to investigate additional policies to cover other risks.

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All information on this page is intended to be a helpful resource when researching, but does not constitute financial advice and should not be relied upon as such.