START-UP COSTS and
CAPITAL SOURCES
by
Jim Chamberlain
Management Counselor
James.Chamberlain@SCORE114.org
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START UP COSTS
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IF YOU DON’T HAVE ENOUGH CASH TO
START YOUR BUSINESS RIGHT, WAIT UNTIL
YOU CAN.
BUSINESS PLAN WILL HELP
Gateway Business Bank
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START-UP COSTS and CAPITAL
SOURCES
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START-UP CASH INVESTMENT
FIXED CAPITAL INVESTMENTS
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START UP
GROWTH
MAINTENANCE
WORKING CAPITAL INVESTMENTS
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START UP
GROWTH
MAINTENANCE
CASH OUTLAYS UNTIL BREAKEVEN
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START-UP COSTS and CAPITAL
SOURCES
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FIXED CAPITAL – How do you calculate how much
your business needs at start-up and to maintain
growth? Do not confuse the justification with how it
will be financed. Justify first, then determine how to
finance the investments.
SALES FORECAST – 24 to 36 months
How much “capacity” investment is required?
How fast will you grow? New products or services?
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START-UP COSTS and CAPITAL
SOURCES
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WORKING CAPITAL INVESTMENTS – The excess
of current assets over current liabilities or the
amount of cash required to fund the business on
a day-to-day basis. An indication of short-term
financial strength. Don’t be under-capitalized.
No business has ever failed because they had
too much working capital.
Working Capital = CURRENT ASSETS minus
CURRENT LIABILITIES
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START-UP COSTS (INVESTMENTS)
FIXED CAPITAL
Office Furniture
Vehicles
Tenant Improvements
Printing Machines
Total Fixed Capital – start-up
$ 2,000
20,000
10,000
20,000
$52,000
Vehicles
Printing Machines
Total Fixed Capital – Year Two
$ 20,000
10,000
$ 30,000
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START-UP COSTS (INVESTMENTS)
WORKING CAPITAL
Start-up
Operating Cash
Inventories
Prepaid Rent
Prepaid Insurance
Total Working Capital – start-up
$ 10,000
15,000
5,000
8,000
$ 38,000
Cash losses – first six months
Total Working Capital – Year One
$ 25,000
$ 63,000
Required Working Capital – Year Two
(Based on a $50,000 increase in sales)
$ 10,000
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CAPITAL SOURCES
HOW BUSINESS ARE REALLY FUNDED
Seed Cash – Percentage of Inc 500 CEOs
surveyed (2002) who launched their company with seed
capital (including personal assets) of:
Less than $1,000
14%
$1,000 - $10,000
27%
$10,001 - $20,000
10%
$20,001 - $50,000
15%
$50,001 - $100,000
12%
More than $100,000
22%
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CAPITAL SOURCES
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EQUITY FUNDING – Financing your business by
selling a minority equity interest. This cash is less
risky but more expensive. Valuation issues must be
addressed. Initial and target valuation calculations
must be made.
43% of founders started the company alone.
The rest had:
1 partner
12%
2-3 partners
36%
4+ partners
9%
CAPITAL SOURCES
Private Equity and Venture Capital funding
Angel investors tend to like proprietary products and
non-capital intensive businesses. They anticipate future
rounds of financing. Angel investors look for:
1.
Market niches – potential to dominate or be #1 or #2 in the
industry
2.
Advanced technology and a disruptive model (going to change
things)
3.
Compelling and sustainable advantage – not “me too”
4.
Planned exit in 4-6 years
5.
Reasonable valuation
6.
Performance equal to 5 -10 times original investment
7.
ROI equal to 20-40% per year
8.
Sitting on your board but not having control
9.
Higher risk business models
10.
Angels spend, on average, 51 hours on due diligence per
investment
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CAPITAL SOURCES
BANK LOANS or DEBT FINANCING
Banks will loan 2.5 – 4.0 times Cash Flow – usually
based on EBITDA
Banks would like to see a 3-5 year track record or a
history of business experience
Debt is less expensive but more risky than equity
Banks will not lend on pure projections: You must
have a history of cash flow or a current personal
guarantee.
Three sources of repayment:
1.
2.
3.
4.
5.
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Cash Flow
Liquidation value of assets
Personal Guarantees of each 25% equity owner
CAPITAL SOURCES
NEGATIVES TO A BANKER
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Getting involved with something outside your normal business
model
Absentee management / ownership
Divorce
Burnout
Growing beyond owner’s capacity to operate the business
Parent turns over business to son or daughter
Computer conversions
Relocation and / or expansion of facility
Companies “hit the wall” at:
Manufacturing companies at $2 million in sales
Distribution companies at $4 million in sales
Retailers at 3 stores and distance
Service companies at 12 employees
Contractors at 2 or more big jobs
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CAPITAL SOURCES
A bank would rather see a 640 FICO score with all
payments as agreed (no late payments,
foreclosures, repossessions, charge offs or
collection accounts) than a 740 FICO score with a
past foreclosure, and three previously delinquent
accounts now paid.
Having a stable source of income to meet personal
income requirements can be a significant factor in
reducing business risk for a start-up.
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CAPITAL SOURCES
QUESTIONS A BANKER WILL ASK YOU
1.
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10.
Do you have a Business Plan?
How much experience do you have in this industry?
How is your credit and how much personal debt do you have?
How much is your down payment? Is it at least 25%?
How much collateral do you have?
Who is the competition?
Do you have personal and business insurance?
Do you have services of an accountant and attorney?
Have you ever filed for bankruptcy?
Do you have 2-4 years of tax returns available?
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CAPITAL SOURCES
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SBA ELIGIBILITY
Cannot be a business in lending, life insurance,
real estate development or rental property.
Gambling, promoting religion, pyramid sales plans,
consumer marketing cooperatives and persons of
poor character are ineligible.
Individuals must be lawfully in the U.S.
Business cannot be located outside the U.S.
Import businesses may be ineligible
Go to www.SBA.gov for a complete list of ineligible
businesses. Also, a good resource for minority and
micro-loan plans.
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CAPITAL SOURCES
MISTAKES ENTREPRENEURS MAKE WHEN RAISING
CAPITAL
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Don’t understand share prices or valuations
Confuse broad market with served market
Make unrealistic assumptions about an exit strategy
Don’t understand long term capital needs
Have no clue about competition
Don’t understand that marketing beats technology 9 out of 10 times
Write a poor executive summary
Use “off the wall” numbers or pull numbers from thin air
Lack focus; e.g. many products or niches
Develop too simplistic of a market plan / analysis
Underestimate expenses
Rely on financial plans with major inconsistencies; e.g. numbers don’t
match or tie
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Speak in “techno-jargon”. No one understands what they are saying
CAPITAL SOURCES
BEST WAYS TO IRRITATE AN INVESTOR
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Lying to investors or not being forthright; omission of
material information
Inability to answer direct questions with direct answers
Surprises; e.g. problem with credit checks, hidden
liabilities or debts
Over hype or exaggerate upside
Your story always changes
Arguing with investors
Late for meetings
Excessive secrecy or legalese; expect investor to sign
NDA
Investing capital in fancy facility and furniture
Fail to attract top talent
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QUESTIONS
SCORE
JIM CHAMBERLAIN
James.Chamberlain@SCORE114.org
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