How Much Money Do You Really Need to Start a New Business?

If you have ambitions to start your own business, one central question to answer is how much start-up money you are going to need. Understanding how much cash you need is vital to ensure your business is sustainable in its early days. Dave Howell, a successful small business owner for over 30 years, reports.

You have a burning idea for a new business, but what’s it going to cost to make that idea a reality? Funding a new start-up with the right level of financial support is critical to get right. And in the current business environment, can you get hold of the money you need to start your business?

Where’s The Investment Coming From?

How you obtain the money you need to start your new business are manifold. According to the latest, Small Business Finance Markets report from the British Business Bank, most small companies prefer to self-fund and, half are being more cautious due to political and economic uncertainty when looking for external funding for their new businesses.

When looking for assistance to start your new business, there are many options to choose from. Also, your location will influence the type and level of financial help you could obtain. Each devolved government manages government funding. Grants and business loans for business based in England, Wales, Scotland and Ireland are all available.

How Much Money Will You Need?

Making an accurate assessment of the amount of the start-up money you need to stat is the first task you need to complete. Creating a business plan is vital to understand the start-up costs of your new enterprise.

Depending on the type of business you are starting, some of your costs will be unique. However, most new business start-ups have other similar costs such as rent on premises, equipment purchases, licensing, insurances and website creation. Making sure you have enough money to meet these costs is essential.

Your business plan will also enable you to forecast your cash flow and how this will move as you run your new business particularly in your first year of trading.

Emma Jones, Founder, Enterprise Nation

Enterprise Nation founder, Emma Jones told Teneric: “I wrote an entire book called Start a Business for £99. Be Your Own Boss on a Budget. The fact that you can build a business in this way has been one of the key drivers behind the rise in start-ups we’ve been seeing in the last decade.

In our view, businesses that start small and without investment right at the beginning learn good habits in cash flow and maximising free support without having to adapt to the will of investors before they’ve even tested their idea.

Clearly there will be higher costs across some sectors, but in our view, this should be minimised. The reality is, the most popular form of finance for small firms is a credit card and an overdraft. It’s important to keep costs low.”

Three Example Businesses That Started With £2,000 or Less

To gain first-hand insights into how much money you really need to start a successful small business, Teneric spoke with a range of small business owners. Deskmate was started with £500. Nick Davies began his therapy services with £2,000 for his training. And Alec Dobbie founded his business with just £1,500.

Deskmate Co-founders, Ashley JP Lockwood [JP] and Arthur Maisonnier.

Nick Davies, Founder, ND Hypnotherapy. [ND]

Alec Dobbie, Co-founder, FanFinders. [AD]

Was the cash you started your business with enough, or did you struggle to start your enterprise?

[JP] “£500 was enough to buy a small batch of stock, build a website and test product market fit. We barely broke even on that money, so we took a loan from Metro Bank and Virgin Start Up to give the business the liquidity it needed to get going.”

[AD] “We would have been able to move quicker with more, but there’s two sides to this: Sure, we may have been able to move faster with the knowledge we have now. But back then, it’s possible we may have gone off on tangents and spent money in the wrong places or on processes that didn’t work correctly. Did we struggle? Not really, but that’s because we had a lot of skilled people who were willing to give up their time for equity, instead of a salary. Without them, it wouldn’t have been feasible.”

Do you think prospective new business owners misunderstand where they need to spend the money, they have to start their enterprises? 

[AD] “I think lots do, yes, because it’s hard to test and learn, to work out where you need to be going and how to spend money in the right ways. There are a lot more ideas floating around about how to do this now compared to 10 years ago because there are more tested frameworks.

“However, people can misunderstand the easy and hard bits. They concentrate too much on the tasks they are good at (tech, for example); and then neglect something crucial like marketing their product. The stuff you don’t know is the tricky bit, because it’s simple to spend money in places where you have expertise compared to outside of your comfort zone. For us, it wasn’t the tech build, but finding the consumers and brands to join our network.”

[JP] “Absolutely. When we started out, we made a lot of mistakes and spent money on areas that really didn’t need the investment. PR was a big one, we thought that an agency would really push us to the next level but in the end, they were not the right fit, didn’t care about the product and we terminated the contract after about two-three months.”

In the early days of your business, where should you have spent more and reduced the money you had available?

[JP] “I’d focus more on customer acquisition channels, digital content for marketing and extending our product lines quicker. Three years into the business we are only now starting to move into new product lines. We released a new WFH desk last week!”

[ND] “I wish I’d done lots more free talks and not wasted money on adverts in local pamphlets or the time I spent posting leaflets for zero return.”

 [AD] “I think we should have spent more on evaluating the experience for our customers, as we do now. The focus should have been on understanding and actively studying how we could best help our customers, as opposed to what we thought would help them.”

What’s your essential advice to anyone planning their new business now to reduce the amount of cash they need to start their enterprise?

[ND] “Use the ‘Lean Model‘, low overheads and high returns. I also advise people to start their business part-time alongside their current job until makes enough money to jump to fulltime. Save at least six months wages for yourself and any staff before doing this. A strong financial foundation is essential to any business success!”

[AD] “If you want to reduce the amount of cash you spend, give people equity and a share in your business. Prioritise getting the right people on the bus and who are willing to work for generous sweat equity and be flexible with timings and their working hours to get stuff done. Sharing ownership can be a vital step.”

[JP] “Reduce your personal overheads as much as you can to give yourself enough runway to give the business a good go. I personally moved into a smaller flat and got consultancy work for a day a week which gave me just enough capital to focus on my own business ventures.”

Emma Jones of Enterprise Nation concluded with this advice: “The best businesses don’t start with a huge budget. One of the most important lessons in business is achieving profitability. First and foremost, keep hold of the day job and work on the business evenings and at the weekend. That way, you’ll get to test it out before you consider quitting and move full-time on the business.”

The amounts of money you need to start a business can be tiny. It’s vital to closely consider every single cost and ask yourself whether you need to spend that money in the early days of your new business. There is funding available from a wide range of source – all of which you can explore. But look closer to home, first. Your own resources, family and friends could all be a great way to fund your new business.

An Expert’s View of Start-up Finance

Gillian Pickard is Finance For Enterprise’s Startup Specialist. Working closely with several funding partners, including Start Up Loans UK, she helps new business owners secure the vital funds needed to launch their own businesses.

Gillian Pickard, startup specialist

Is there an average amount of money needed to start a new business, or are start-up costs specific to each enterprise?

“The average loan for a start-up company is currently around £7,000, but the amount of capital required by each new business depends on a wide variety of factors. An engineering firm might require heavy, intricate, or bespoke equipment and, is likely to need a larger amount of working capital compared with the start-up’s costs of a mobile beauty salon that only requires basic equipment and a smaller amount of working capital.

“Entrepreneurs’ aspirations can also have a significant impact on the amount of start-up funding they receive. Start-ups are often very ambitious and passionate about their business idea and future growth plans. Without a sensible and detailed business plan, new business owners can either overestimate their planned expenditures, resulting in an unnecessarily expensive loan they don’t need.

“One of the common pitfalls facing new entrepreneurs is underestimating the amount of capital required due to a lack of research and/or unforeseen extra expenditures. Planning your cash flow is an essential task for new business owners.”

Are some businesses more expensive than others to start?

“Of course! From my experience as a start-up specialist at Finance for Enterprise (FFE), the main factors influencing the amount of funding a start-up business requires is often its equipment, facilities, and premises. These factors vary depending on the sector a company operates within, and of course, costs can vary significantly due to the location.”

Has there been a continuing trend for new business owners to ‘bootstrap’ their funding and avoid the strings that are often attached to outside funding?

“It goes without saying that the most cost-effective way of starting a new business is to borrow money from friends or family who may provide interest-free capital. However, like any form of lending, this isn’t without risk, and my advice would be to draw up a clear contract outlining the terms of repayment.

“Many new entrepreneurs are often surprised when lenders don’t share the same appetite for their business aspirations, which can often mean traditional high street borrowing is simply not an option. However, this does not mean that the business idea isn’t viable.

“One way of helping new entrepreneurs to access business lending is through the Start-Up Loans scheme, which is delivered by the British Business Bank. Start-up Loans can provide new business owners with access to a low-interest loan and funding up to £25,000.”

Is funding for new start-ups challenging to obtain?

“When applying for funding, all lenders will expect a business idea to be backed by a clear business plan and a cash flow forecast. The more information provided will help lenders to gain a greater understanding of your business and determine whether the idea is viable and profitable.

There are many different options for start-up businesses when it comes to raising finance, for example, crowdfunding, angel investment, and traditional business loans. There are pros and cons associated with all funding options.”

What impact has COVID-19 had on the funding for new businesses?

“Start-up money is very much available for all would-be entrepreneurs! Although COVID-19 has impacted the economy, many individuals have been affected by furlough or redundancy have turned to self-employment as a means of generating income. The government-backed Start-up Loans Scheme is still available, and at FFE, we have noticed a significant rise in enquiries to fund new business ventures.”

How do you think Brexit may impact the funding available for new business start-ups?

“There is no doubt the appetite for risk amongst many high street lenders has changed in recent years. The combined impact of regulation imposed following the global financial crisis, additional lending commitments as a result of CBILS (Coronavirus Business Interruption Loan Scheme) and CBILS lending commitments, and concerns about a post-Brexit economy has seen some banks tighten their belts when it comes to offering start-up money lending. Entrepreneurs may need to explore alternative sources of funding when it comes to raising finance.

“Alternative funding for start-up money lending for SMEs will be available for the foreseeable future even as Brexit continues to progress largely because schemes such as Start-up Loans are backed by the British Business Bank. Circumstances may change for entrepreneurs wanting to enter particular markets involving trading with the EU, and I strongly advise businesses to have a plan and become ‘Brexit Ready.’ In my view, it is unlikely there will be any significant disruption or changes for start-up money funding in the near future.”

What are the practical steps new business owners can take to reduce the amount of cash they need to start their enterprise?

“Reuse, revamp, recycle! New business owners should always consider the option of using their own equipment or purchasing second-hand goods. As long as it does not especially reduce the quality, safety, or efficiency of the product or service their business produces, it can cut costs considerably.

“Reduce non-essential spending. When finally receiving the capital required, some entrepreneurs begin to lose track of their spending or simply overspend on non-essential parts of the business. In some sectors, even larger loans can be quickly squandered in areas the company doesn’t need.

“Shop till you drop! Shop around and compare for the essential spending. Research, search, talk, and barter for every bit of essential expenditure your new business needs it will be worth it in the end.”

What do you think the future of funding for new start-ups looks like?

“If I had a crystal ball, I think we will see more people over the next few years begin to explore running their own business. This will mean demands on existing start-up money lending providers is likely to increase. We have seen new entrants into the market, for example, through new challenger banks offering different ways of raising finance.

“One area which I think will change will be the relationship between lenders and customers. It can be easy for start-up businesses to be rejected by a computer without knowing the full details behind the business.

“Face-to-face banking is declining across the UK, which can often leave new business owners unsure where to turn for advice. All too often, decisions made by a computer algorithm won’t take into account the broader impact of a new business. It’s one of the reasons why at FFE, we spend time working with new business owners to determine the best lending option for their business. We always look beyond the balance sheet and understand what impact a lending decision will have on the broader community, for example, jobs created, supply chains, and building stronger local and regional economies.

“When starting a new business, it is essential that entrepreneurs remain realistic and thoroughly plan for the business they want to own. If the overall objective is to have a large successful company, starting small and learning to walk before you can run is essential. Building a strong business plan and strategy will help provide yourself with the perfect foundation to work from and provide potential lenders with an indication of your intentions, motivations, and aspirations.”