Lesson 1: Before You Start
Two kinds of money
Before you start your business, you have to decide how much money you're going to need and you have to make sure that you have it available. You will need money to set up, start and run the business but you should also have the possibility to borrow some money should something unexpected happen or your business do extremely well.
The reason you should arrange this before you start your small business is that, in my experience, banks don't lend money to new small businesses. Not only that, they are quite likely to reduce your credit, call in lines of credit and otherwise reduce your ability to get credit if they find out you have started a small business. The thing to do is arrange for all your financing needs before you start your small business and to avoid applying for more credit until your business is older and established.
Let's go back to the two kinds of money you'll need. First you'll need money to start up and run your business. This is money for a computer, a desk, office supplies, a fax machine, an additional telephone line, Internet service, gas for your car and anything you'll need to produce your product or service. This amount could range from a few hundred dollars to several thousand and, if you're going to buy an established business or a franchise, it could be much more than that.
At the lower end of this range, you might already have a lot of these things or get them second hand. If you're providing a service, you don't have raw materials to buy and don't have a lot of out-of-pocket expenses. A few hundred dollars will get you going until you start getting money coming in.
You'll be at the upper end of the scale if you have to have a good office so that customers can visit or if you must buy equipment or raw material to produce what you're offering. A good business office with a nice desk, filing cabinets, computer etc. can be set up for around $5000.00. If you need equipment or if you are going to buy a business, the sky's the limit. In any case, this is money which you need to have on hand, saved up or borrowed, before you can start your business.
The second kind of money should be there and will be needed if you're doing well. There is nothing more frustrating than to have your business succeed and have a large order come in which you can't finance. Early on, after I started my first business, I received an order which required me to buy three expensive computer systems. Luckily I had a line of credit which was just enough to cover the cost although it was stretched to the limit. A few months later, after I had completed the contract and been paid, I was able to pay the line of credit down again. Without that line of credit, I would have had to refuse the order or try to negotiate a large down payment.
You need to have credit in place to take care of such financing needs and you should try to arrange it before starting your business. If you can, it also makes sense to go for a secured line of credit, possibly giving your house or other property as security. That's because, if the line of credit is secured, the bank will not worry about it but if it's not, you run the risk of the bank cancelling it just when you need it. There is no danger of you losing your house or other property from this as long as you use it as planned, to finance orders, and not to finance operating costs. Chapter 4 of our recommended text, "Turn Your Passion into Profits", goes into financing in more details and explores other options as well.
Now you're all set to start making decisions and get your own small business going. We'll just go through what you now have in the next section.
