Lesson 3: Startup Capital


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The goal of this lesson is to provide an overview of the most common methods for financing a new business or organization: debt and equity. The lesson begins with an overview of why businesses need external financing and what types of resources are most often needed for a new business. The pros and cons of debt and equity are then introduced, as are the most common features of each. The lesson then applies these same concepts to an existing business from a new project perspective, incorporating the idea of self-generated capital as an additional financing option.

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Lesson 3: Startup Capital

  1. 1. Startup Capital and Financing Objective: To understand how to estimate the amount of capital needed to start your business and what types of financing are most common for new businesses.Novus Business and IT Training Program
  2. 2. Startup Capital• Startup Capital = Resources Needed to Start Your Business• One-Time Costs vs. Recurring Costs• Financing Options: Debt vs. EquityNovus Business and IT Training Program 1
  3. 3. One-Time Costs• What do you need to open your business? – Example: Renovated building – Example: Machinery and equipment – Example: A delivery truck• Current Needs• Future Needs Based On Projected GrowthNovus Business and IT Training Program 2
  4. 4. Recurring Costs• What monthly, quarterly, or annual expenses will your business incur? – Example: Rent – Example: Wages and Salaries• When will the business’s profits be greater than the recurring costs?Novus Business and IT Training Program 3
  5. 5. Financing Options• One-Time Costs + Recurring Costs (until business is profitable) = Startup Capital• Be conservative• Two Main Sources of Capital – Debt – EquityNovus Business and IT Training Program 4
  6. 6. What is Debt?• Money you have to pay back• Key Considerations: – Amount (“Principal”) – Payback Period – Interest RateNovus Business and IT Training Program 5
  7. 7. Benefits and Risks of Debt• Benefits: – Simplicity – Interest payments may have tax benefits – No loss of control in your business – Debt is “cheaper” than Equity• Risks: Bankruptcy = Loss of Your BusinessNovus Business and IT Training Program 6
  8. 8. What is Equity?• Capital in exchange for an ownership stake in your business• Key Considerations: – Control given to outsiders – Investors have right to some or all of the business’s profitsNovus Business and IT Training Program 7
  9. 9. Benefits and Risks of Equity• Benefits: – No repayment – Reduced threat of bankruptcy – Strategic advice and support of investors• Risks: – Loss of control over business’s strategy and future profitsNovus Business and IT Training Program 8
  10. 10. Summary: Debt vs. Equity Debt Equity • Straightforward • Highly negotiable Advantages • Potential tax benefits • No repayment terms • No loss of control • Valuable source of advice • Potential loss of strategic • Requires repaymentDisadvantages • Threat of bankruptcy control • Potential loss of future profitsNovus Business and IT Training Program 9
  11. 11. Capital Planning• Same principles apply• Retained Earnings = Accumulated Profits of Business• Benefits of Retained Earnings: – Reduced need for additional debt or equity – Improved chance for business sustainability – FlexibilityNovus Business and IT Training Program 10