Raising Capital and Understanding the Numbers

You need money to start and run a business.  That's a fact few will dispute.  However, it is one thing to have seed money to get started in business, but another to have sufficient capital to sustain the business during the early start-up phases.  Many good businesses have failed because they were under-funded.  The ability to estimate realistic start-up costs and raise sufficient capital is critical to the success of your business.

In this section, we will discuss estimating start-up costs; where to find needed capital; borrowing money; understanding the numbers; and the accounting process.


Estimating Business Start-up Costs

When starting a new business, it is important that you carefully estimate how much it will cost.  To do this, you need to estimate your initial fixed costs, plus your estimated monthly expenses.  Your monthly expenses should be projected for three to six months to allow the business to generate cash flow.  Your total estimated start-up costs would then be calculated by adding your fixed costs to your monthly projections. 


Start-up Costs Estimator

Initial Fixed Costs
Monthly Expenses
Sample Business Plans $ Salaries $
Real estate & buildings   Employee benefits  
Fixtures & furniture   Loan payments  
Initial inventory   Telephone  
Legal fees   Auto expenses  
Licenses & permits   Insurance  
Deposits   Taxes  
Initial working capital   Utilities  
Office equipment   Rent  
    Inventory purchases  
    Advertising & promotion  
Sub-total $ Sub-total $


Initial Fixed Costs Sub-total
Monthly Expenses Sub-total…..x 3
Estimated Start-up Costs

Where to Find Needed Capital

There are several important sources to consider when looking for funding to start and/or run your business.  Considering all options is your best choose.  Key sources include:

  • Savings : The majority of new small businesses are started initially with funding that comes from savings and other forms of personal equity.
  • Friends and Relatives : Many small businesses are started with funding from friends and relatives. 
  • Credit Cards : Hard as it may be to believe, a number of small enterprises are founded with initial capital from personal credit cards.  This may sound easy, but use extreme caution.  Credit cards may be an easy source of capital, but the interest charges and payment expectations could be deadly to a new business.
  • Banks and Non-bank Lenders : Lenders can be a very helpful source of business capital.  However, you must be able to demonstrate sound credit and the ability to re-pay the loan. 
  • Angel Investors and Venture Capital Firms: Investors and venture capitalists will sometimes provide funding for new businesses in exchange for equity or part ownership.  This type of equity financing is not very common for typical new small businesses.


Borrowing Money

Borrowing money is one of the most common sources of raising capital for a small business.  However, obtaining a loan is not always easy.  Bankers are generally very careful – as they should be -- about lending money.  However, it is the inexperience of small business owners in financial matters that prompts many small business loan requests to be declined. 

It is important to know what a lender considers when reviewing a loan request.  Five areas of consideration stand out. 

  1. Ability to Repay : You must be able to demonstrate that you can repay the loan.  A lender will look for two sources of repayment cash flow from the business and a secondary source such as collateral.
  2. Credit History : One of the first things a lender will do is to check the credit history of the individual(s) and business requesting the loan.  Do everything you can to make sure your credit history is good.
  3. Equity : Lenders want to see a certain level of equity in the business before a loan is granted.  Typically, a lender likes to see that business liabilities do not exceed four times the amount of equity an owner has in the business. 
  4. Collateral : As noted earlier, lenders like to have a second source of loan repayment.  Collateral would be personal or business assets that could be sold by the lender to repay the loan.  For instance, most auto loans are collateralized by the car that is purchased. 
  5. Experience : A lender will look very carefully at the experience of the borrower in running the business, before a loan is granted.  If you don’t have appropriate experience, your chances of getting a loan are greatly diminished. 

Loan Options

Small business owners or prospective owners have many options when it comes to borrowing money.  A primer course of this nature can not meaningfully discuss all such options.    

However, before you borrow money for your business, make sure you become an educated credit consumer.  This means doing your homework.  The information resources listed below should be helpful.    


Getting Assistance to Write the Business Plan

Preparing a good business plan is one of the most important things an entrepreneur can do.  Much assistance is available.

Type of Assistance
How to Find
Bank loans
Contact your local bank
State subsidized business loans
Contact your state economic development agency
SBA loan programs
SBA micro-loans
Requirements for SBA loan assistance
Financing basics
How to apply for a loan
Writing a loan proposal
Bank loan request template (from SCORE)
Loan package checklist
SBDCNet finance assistance
Assistance in writing a loan proposal
Contact your local SBDC office (http://www.sba.gov/sbdc/sbdcnear.html) or SCORE chapter (http://www.score.org)

Understanding the Numbers

The financial performance of any business is measured by the interrelationships among six essential elements: assets; liabilities; equity; income; expenses; and, profits.  The success of a business depends heavily on how well these elements are planned, controlled and executed.

These elements also compose the three primary financial statements – balance sheet, income and cash flow statements. 

Balance Sheet : The balance sheet is considered a snap-shot in time and represents the basic accounting equation: Assets = Liabilities + Equity.  

Learn about the Balance Sheet


Balance Sheet Template



Income Statement : The income statement is a measure of how a business has performed over a specific period of time, usually six months or one year.  It measures all income, less all expenses to arrive at the amount of  profit or loss generated by the business for the period.

Learn about the Income Statement


Income Statement Template



Cash Flow Statement : The cash flow statement tracks all income, expenses and available cash in monthly intervals.  It is intended to help business owners plan and avoid cash shortages. 

Cash Flow Worksheet Template