Startup Capital for a Business
Startup capital is the money injected into the business by owners and investors to help fund start up costs.
Any startup costs not funded by capital investment will need to be funded by debt and borrowings. To illustrate suppose the startup costs are 50,000, and the capital injected by the owners and investors is 30,000. In this case the balance of 20,000 is found from debt such as startup loans, supplier credit, or lease finance.
In return for injecting the start up capital, the owners and investors receive a percentage of the equity of the business. Equity investors make a profit through capital appreciation when selling the business, or through dividends from the business.
Startup Equity Calculator
Determining equity distribution in a startup is complex because founders need compensation for their efforts and ideas (sweat equity). Our startup-equity calculator is a useful tool to start the process of deciding how the equity in the business is divided between the founders and the investors.
Additionally investors will want to know the estimated return on their investment before investing. Accordingly our return on investment calculator will help to compare alternative scenarios.
The amount of startup financing depends on factors such as the business type, current state, and growth potential. It is important to realize that the more start up capital you raise the more of your business you will need to give away.
Sources of Capital
There are several potential sources to consider when looking how to raise capital for a startup business. These sources include the following.
- Personal savings
- Friends and family
- Crowd funding and peer to peer lending
- Angel investors
- Venture capital
Additionally our post on how to finance a business gives more background information on how to fund a startup and find capital.
Business Startup Capital in the Financial Projection
Having decided on the business startup capital, it needs to be included in the financial projections template. How it is included depends on whether it occurs before or after the date the financial projection is started.
We recommend startup capital is included in the start up costs calculator under the heading of owner or investor capital. Additionally this template also deals with debt funding, and provides an opening balance sheet for inclusion in the financial projections template.
Having been injected before the start of the plan, the startup capital included in the start up costs calculator forms part of the startup funding. The capital is included in the opening balance sheet under the heading of Owner or Investor capital.
There is however, nothing to stop a business starting the financial projection on day one before injecting any start-up capital. In this case the capital in the opening balance sheet will be zero. Any new capital is then included in the cash flow and balance sheet for the relevant year. Whether startup capital is included in the financial projection as part of the opening balance sheet or as part of the year one balance sheet is a secondary issue.
Remember, the main aim of this task is to estimate the total startup capital available to get the business of the ground. Any shortfall in funding for startup costs will then need to be financed by debt.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to calculate the startup debt finance needed to fund the balance of the startup costs.
This is part of the How to Create Financial Projections Guide. The guide is a series of posts on how our template is used to produce simple financial models for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.