Starting a new business is an exciting journey for an entrepreneur – you finally step into the marketplace with your business idea and make it a reality. However, this excitement often comes with financial dilemmas. Before it starts to generate sufficient revenues, you have to think about how you will pay the initial costs and ensure smooth sailing of your business.
The first few years in operations are crucial to determine whether the business is likely to be successful in the long term or not. According to research, only 56% of start-ups survive past the first 5 years and 82% of those that fail do so due to poor cash flow management. So, a good financial management in the early years is crucial for a business.
Looking at the costs incurred by a start-up, there are many reasons why financial support is essential for a business in its initial stages – this is the time when costs are high and revenue is low. Therefore, having some financial backing ensures that your ship doesn’t sink before it even sets off towards its destination.
Here are 15 reasons why your start-up could benefit from a business loan.
1. Purchase of equipment
Every new business venture, regardless of the industry, needs some equipment to operate. A food business will require burners, ovens, dishwashers and other cooking equipment while a transport business may require vehicles. Some equipment is essential for all businesses such as computers, printers and office chairs.
Due to its high cost, equipment it is one of the main reasons why start-ups require external financing – equipment loans are a good option whereby the bank lends money to the business, using equipment as collateral.
2. Acquiring office space
If you are thinking of renting an office space, you will probably have to pay a security deposit and a few months worth of rent in advance. Being a significant amount, depending on the location of the space, size, and facilities, it often requires business loans.
Also keep in mind that rent is a fixed cost – you will have to pay it regardless of the revenue you generate, so it is best to have a few months’ expense in hand before starting off.
3. Incorporation costs
A start-up needs to register their business with a government agency. Depending on whether your business is going to be a sole proprietor, partnership or a limited company, there will be different legal requirements to comply with and a different registration process. Registration involves some paperwork and a fee, for which the business needs funds before it takes off.
4. Licenses and permits
Certain industries require businesses to obtain a license or permit before they can begin their operations. For example, businesses providing services in construction, engineering, insurance and healthcare need a license to operate.
Food businesses may also require inspection and certification as it is a matter of public health. You can check with the business licensing department in your local area whether your business will require a license it not. These licenses come at a cost and are another expense the business must bear before it launches its operations.
5. Cost of market research
Before bringing any new business idea to the market, it is essential to do a meticulous market research to gain an understanding of the market. Market research tells you who your customers are (in terms of age, social status, lifestyle, and income), what they want from your product (features, price) and who your competitors are. This information helps you decide where to position your product in the market.
Often, market insights or industry trends, help you formulate your business accordingly. You can come up with innovative ideas to survive the cut-throat market competition.
Whether you decide to conduct the research yourself (through surveys/interviews) or hire a researcher, market research is a preliminary expense that will require funding from an outside source.
6. Cost of product development
Once the business has an understanding of its market niche, the next step is to develop a product that can succeed in its chosen target market. Market research helps identify gaps in the market – areas where there is customer demand but is unmet by current suppliers. You can then exploit such opportunities by coming up with a product and marketing mix (price, features, promotion tactics) that helps fill the gap.
Product development costs money – the start-up may have to experiment with different materials and features, and test different versions of the product before it decides on the perfect one.
7. Patents and copyrights
While this does not apply to all start-ups, it is a cost for some. If you have a unique business idea, you should ensure protection of your intellectual property before your business goes into operation. Registering a trademark or a patent requires filing of specific documents and paying a fee, but it ensures your business idea will not be copied by a competitor.
If your business requires selling goods, you need to have a stock of finished goods at hand, before you open your doors to the customers. Building up stock requires money due to the cost of acquiring raw materials and converting them into finished goods.
Exactly how much inventory should you hold in the beginning? Although bulk purchasing and production can result in lower costs per unit, holding inventory has a cost (storage costs and the risk of damage and obsolescence).
However, you can’t stock too little inventory and lose customers as a result. A start-up should have an estimate of expected demand and produce a little extra, to be on the safe side.
9. Marketing campaigns
Every start-up needs a marketing budget to inform customers of its offerings. What’s the use of producing goods/services if customers aren’t buying it? Therefore, marketing is crucial to surge growth as it increases sales.
Yet, marketing strategies require a lot of money to launch a successful campaign. The money, in case of start-ups often come through funds. Offline marketing is done through business cards, brochures, banners and paid advertisements in local magazines. Online platforms, such as social media aren’t without a cost too.
A marketing campaign whether online or offline requires creating a plan, hiring a team, resources, etc. which runs smoothly through external funds.
10. Company website
Almost all businesses nowadays, no matter small or big, have a website. With the number of Internet users increasing day by day, it is vital for every business to maintain a strong online presence.
A website tells customers about who you are as a brand, helping you connect with them on a personal level. You also have the option to sell online. Although building a website may involve hiring a professional and a monthly payment to keep it running, it is an investment that results in huge ROIs.
11. Hiring of professional services
When starting a business, it is good to seek advice of experts in handling technical matters. For example, a legal advisor can take care of company incorporation and obtaining necessary licenses while a financial advisor can help arrange funding, based on the business’s needs and when dealing with complex matters, such as taxation.
Although the business may initially have to pay for these services with the help of external financing, it helps ensure smooth operations in the long term.
12. Managing credit sales
If the start-up operates in an industry where credit sales to customers are a norm, it will have no option but to follow the trend. However, credit sales create a lot of pressure on the cash flows of a new business as it already has limited inflows and a lot of expenses.
For this reason, invoice financing is a viable small business funding option, where the start-up is able to receive money against its receivables immediately from a lender.
13. Paying employee salaries
Salaries are an expense that start-ups pay to their employees, even when there is little or no revenue in the initial stages of its formation. You can try to minimize employee costs initially by working with a limited team.
However, when the business starts to expand or receive more orders, it needs to hire more employees to continue to flourish. So, a few months’ worth of salaries should be kept in reserve to avoid losing key staff members, in case of financial problems.
14. Filing for insurance
Every start-up needs some kind of business insurance – whether it is for protection against legal action by consumers or to reduce losses as a result of unfortunate events such as a fire or earthquake. The cost of insurance depends on the type of business, its industry, and level of risks it is exposed to. Nonetheless, it is an expense that needs external funding.
According to research, almost two-thirds of small-scale start-ups incur some form of unanticipated expenses during their crucial first year in business and experience a slowdown in growth or loss of profits as a result of not having the funds to cope with the situation. As a start-up, it is important to have funding options available for unforeseen scenarios in case the need arises.
Though the right way would be to create a contingency business account but if the business doesn’t have one, then alternative financing or traditional loans are a sound option.
The Final Verdict
To sum up, start-ups incur significant costs in the initial stages and a business loan can help the business stand on its feet at a time when it needs financial support, helping it to survive, thrive and head towards the road to success.