START-UP COSTS and

CAPITAL SOURCES

by
Jim Chamberlain
Management Counselor
James.Chamberlain@SCORE114.org

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START UP COSTS

IF YOU DONT 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
START-UP CASH INVESTMENT
FIXED CAPITAL INVESTMENTS
START UP
GROWTH
MAINTENANCE

WORKING CAPITAL INVESTMENTS

START UP
GROWTH
MAINTENANCE

CASH OUTLAYS UNTIL BREAKEVEN

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 START-UP COSTS and CAPITAL
SOURCES
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
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. Dont 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 $ 2,000
Vehicles 20,000
Tenant Improvements 10,000
Printing Machines 20,000
Total Fixed Capital start-up $52,000

Vehicles $ 20,000
Printing Machines 10,000
Total Fixed Capital Year Two $ 30,000
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 START-UP COSTS (INVESTMENTS)

WORKING CAPITAL

Start-up
Operating Cash $ 10,000
Inventories 15,000
Prepaid Rent 5,000
Prepaid Insurance 8,000
Total Working Capital start-up $ 38,000

Cash losses first six months $ 25,000

Total Working Capital Year One $ 63,000

Required Working Capital Year Two $ 10,000

(Based on a $50,000 increase in sales) 7
 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% 8
 CAPITAL SOURCES

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%
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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

1. Banks will loan 2.5 4.0 times Cash Flow usually

based on EBITDA
2. Banks would like to see a 3-5 year track record or a
history of business experience
3. Debt is less expensive but more risky than equity
4. Banks will not lend on pure projections: You must
have a history of cash flow or a current personal
guarantee.
5. Three sources of repayment:
Cash Flow
Liquidation value of assets
11 Personal Guarantees of each 25% equity owner
CAPITAL SOURCES
NEGATIVES TO A BANKER

1. Getting involved with something outside your normal business

model
2. Absentee management / ownership
3. Divorce
4. Burnout
5. Growing beyond owners capacity to operate the business
6. Parent turns over business to son or daughter
7. Computer conversions
8. Relocation and / or expansion of facility
9. Companies hit the wall at:
1. Manufacturing companies at $2 million in sales
2. Distribution companies at $4 million in sales
3. Retailers at 3 stores and distance
4. Service companies at 12 employees
5. 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. Do you have a Business Plan?

2. How much experience do you have in this industry?
3. How is your credit and how much personal debt do you have?
4. How much is your down payment? Is it at least 25%?
5. How much collateral do you have?
6. Who is the competition?
7. Do you have personal and business insurance?
8. Do you have services of an accountant and attorney?
9. Have you ever filed for bankruptcy?
10. Do you have 2-4 years of tax returns available?
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CAPITAL SOURCES
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

1. Dont understand share prices or valuations

2. Confuse broad market with served market
3. Make unrealistic assumptions about an exit strategy
4. Dont understand long term capital needs
5. Have no clue about competition
6. Dont understand that marketing beats technology 9 out of 10 times
7. Write a poor executive summary
8. Use off the wall numbers or pull numbers from thin air
9. Lack focus; e.g. many products or niches
10. Develop too simplistic of a market plan / analysis
11. Underestimate expenses
12. Rely on financial plans with major inconsistencies; e.g. numbers dont
match or tie 16
13. Speak in techno-jargon. No one understands what they are saying
 CAPITAL SOURCES
BEST WAYS TO IRRITATE AN INVESTOR

1. Lying to investors or not being forthright; omission of

material information
2. Inability to answer direct questions with direct answers
3. Surprises; e.g. problem with credit checks, hidden
liabilities or debts
4. Over hype or exaggerate upside
5. Your story always changes
6. Arguing with investors
7. Late for meetings
8. Excessive secrecy or legalese; expect investor to sign
NDA
9. Investing capital in fancy facility and furniture
10. Fail to attract top talent 17
 QUESTIONS

SCORE
JIM CHAMBERLAIN
James.Chamberlain@SCORE114.org
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