How Much Should You Borrow To Speed-Launch Your Business?
Knowing how much to borrow to launch your business quickly is always challenging. You know you need to invest but don’t know how much.
This guide can help. It examines some factors to consider when launching a business quickly and provides guardrails to prevent serious financial trouble.
Calculate Your Essential Startup Costs
First, look at your essential startup costs and see how much it will set you back to set up your business. You want to calculate things like product development costs, inventory, equipment, and marketing and determine what these elements will cost and how much they might set you back.
Weight Debt Against Revenue
Next, you’ll want to weigh your debt against your revenue. You want to determine whether you can generate the cash flow to pay back your initial costs.
Remember, profits will likely be slow, so you’ll want to take a more conservative revenue approach. Don’t assume that sales will take off immediately, as it can take a while for people to shift to a superior product, even if it is measurably better than your rivals.
Also, factor in the possibility that competitors will retaliate by improving their products and making the market more competitive again. Being a first-mover is challenging in an environment where you’re just starting up.
Compare Loan Options
You also want to compare loan options, which Credit Loft suggests. Different types of loans may be beneficial, depending on your situation.
For example, you might want to go into venture debt in some circumstances if you’re playing with a high-risk, high-return idea. SBA loans are another option. You could even take out a business line of credit if you’re an established business that wants to go in a new direction and explore new possibilities in your niche.
Stick To Borrowing Rule Of Thumb
While doing all of this, you’ll want to stick to various borrowing rules of thumb. You don’t want to exceed 30% of projected first-year revenue in debt to avoid a catastrophe later.
If you can bootstrap your way to success, do that instead. Make sure to use scaling rules to decide how much debt to take on based on the anticipated size of the market. The more customers you have and the more revenue your firm can generate, the better you can handle your debt situation.
Account For Hidden Costs
You should also account for hidden costs and emergencies. Remember that business can go wrong when considering debt, and nothing is guaranteed to work out perfectly.
Make sure you maintain your reserves in case you need them for a rainy day.
Put Together A Repayment Plan
Finally, make sure you have a sensible repayment plan in place. Ensure you understand your cash flow in the future and can continue to pay suppliers and other business associates.
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