Start-Up Costs and Financing a New Business

Objective:

• To ensure that the new business owner fully appreciates the potential costs involved in setting up a new business
• To ensure that sufficient contingencies are built in to the financial forecasts
• To evaluate different funding options or opportunities.

Overview:

This activity is designed to provide an opportunity for the entrepreneur/ small business owner to consider the costs of setting up a new business and the financing options available.

Activity:

Does the entrepreneur/ small business owner already have some equipment or stock etc. that can be used in the business? What additional start-up costs will be incurred in order to successfully start the new venture?

This can be broken down into:-

1. Premises costs. If renting, then any refurbishment costs may need the landlord’s approval.
2. Equipment (this may be sub-divided into office equipment, production equipment etc.)
3. Stock. Initial stock and cost of replenishing this as it is used.
4. Promotional Costs. This can be high in the early months in order to get the new business known.
5. Overheads. For example, rent, rates, utilities, insurance etc.
6. Employment Costs (both for the owner and any staff for the first few months until income is being generated).
7. Sundries/ Contingencies. It is never easy to forecast for every type of cost that a new business may incur. As such, it is good to have some form of contingency for such ‘unexpected’ costs.

Once the above Start-Up costs have been completed, it is only then that the Financing can be considered. If the start-up costs are higher than at first anticipated, it may be that the new business owner needs to re-evaluate these costs. For example, consideration of renting items of equipment instead of buying etc.

Financing the new business start-up.

1. Where can the new business owner go to access funding? This really depends on the amount of funding needed. For example, if this is less than £10,000 then a good place to start would be the Start-Up Loan Scheme. If more than £10,000 is needed then it might require a combination of potential lenders. It helps, however, if the business owner has some personal monies to invest into the new venture (or perhaps, friends or family).
2. How long will the funds be needed? Loans from The Start-Up Loan Scheme can be repaid over 1 to 5 years. For larger projects it may be possible to repay loans over 10 or more years. It very much depends on the amount of funding and what the monies were needed for.

What if things change and I need additional funding? As long as the new business owner can demonstrate that they are running the business well, they may be able to access further finance to assist their growth plans. This is why it is so important to have a good business plan and to monitor how well the business is actually performing compared to the plan.

Skill Development:

By developing analytical and financial forecasting skills within entrepreneurial learners, it is possible to test assumptions and explore alternative ‘what-if’ scenarios in the context of a business start-up.

This breaks down some of the key thinking and skills of the entrepreneur and allows the students to work through their assumptions.  This can be conducted in groups, or as individuals, allowing students to focus on start-up.

Resources:

• Pens, paper and calculators