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Stearns Bank Lender Lays Out Cost Scenarios For Starting Up A Business

Aug 14, 2020
Posted by: Stearns Bank

In a start-up business, hard work and determination go a long way. But it’s important to remember to plan for the costs you’ll be facing.

Some costs might come as a surprise. When you’re estimating the costs of starting a business, be sure to conduct research, meet with other business owners and carefully assess your needs. Then you can be confident that your estimated costs are realistic.

Lacking an understanding of start-up costs, new business owners risk running out of capital. Then, they are forced to go back to their lender, or investors, for a second round of financing before opening their doors.

Josh Villa, vice president and SBA lending manager at Stearns Bank, advises not to rush when researching and developing a business plan.

“Start-up costs are one of the most important pieces of a business plan because without complete planning, there could be shortfalls,” Villa said. “Don’t rush your planning. Think through all the costs that are needed to get your business up and running.

“Attending virtual industry conferences and webinars, networking with other business owners, can help you identify the costs of getting started.”

The First Step

All businesses need to start by registering as a legal entity – also known as business structure – with the state you’re operating in. Registering as a legal entity protects the business owner’s personal finances in the event of a lawsuit, economic collapse or business failure.

“As a part of the start-up or purchase process, a small business owner will have to create a legal business entity that the business operates under. It is important to consult with an accountant and attorney on which kind of entity you should create for your business and the structure. Your business entity will need to be established before closing on your small business loan,” Villa said.

Consulting a tax professional is a crucial step in the process. A tax professional or accountant can be a vital partner for any new small business owner. They can help you forecast business tax expenses and advise you on tax implications for expansion, purchase or sale.

Projecting Your Staff

During your research on start-up costs, project how many employees you can afford to have on staff.

If you’re going to have an office manager or bookkeeper, they can handle the payroll for you. Nevertheless, many small business owners do this themselves, or use payroll or accounting software to get the job done.

“Estimating the cost of employees is tricky and can have a big impact on the success of the business because it can use up working capital. Having reasonable sales projections will help with the planning,” Villa said. “If you know how many units of product you expect to sell, you can get an idea of how much payroll expense to budget for.”

Marketing The Business

Advertising -- including billboards, social media, print or broadcast -- should be included in your start-up planning. A marketing strategy, identifying marketing channels, target audiences and messaging, should be in place before your business opens its doors.

For instance, research what a reasonable budget for a social media advertising budget is. Investigate which social media platforms suit your industry the best and explore how you can get the word out about your business.

“This strategy can help establish a customer base and revenues, prior to your doors opening for business,” Villa said. “A website can play a vital role in online marketing and information sharing. Corporate websites can tell prospective customers about your business, allow for online registration for enrollment and assist in marketing efforts.

“Having an online presence is very common in today’s small business world and can help in meeting financial projections.”

A website provides a digital front door for customers to learn about your business and enables customers to find you in search engines.

Equipment & Inventory

Your business’s equipment costs also need to be factored in to total startup costs. Depending on your industry, used equipment typically is more affordable. However, if your used equipment requires constant repair and maintenance, these costs should be factored in to monthly or yearly projections.

“Determine how much equipment is needed to produce your product,” Villa said. “Oftentimes, there are economies-of-scale considerations when determining which equipment is best to buy. That’s why sales projections are important to consider.

Inventory planning, particularly if the inventory is perishable, can make the difference between being profitable and carrying a loss. “

Even if the inventory isn’t perishable, overbuying can cause storage concerns and use working capital that could be used instead for marketing or payroll. The flip side is that keeping inventory too slim can result in lower sales and customer dissatisfaction if you don’t carry what customers need. You can’t miss out on more favorable terms that suppliers will sometimes provide in large orders.

Lenders Are Willing To Listen

It’s never too early to talk with a lender to get a better understanding of the loan process and general requirements. You don’t need a business, or even a specific business in mind, to talk with a lender. Nevertheless, the more specifics you have, the more a lender can provide beneficial feedback.

To move forward with a loan application, you will need a business plan, including three years of projected revenue and costs. Lenders also will need personal tax returns and financial statements early in the process.

If you’d like to speak with someone at Stearns Bank about your small business aspirations, don’t hesitate to click below.

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