Startup Capital for a Business
Startup capital is the amount of money injected into the business by the owners and the investors to help fund the start up costs.
Any startup costs not funded by capital investment will need to be funded by debt and borrowings. For example, if the startup costs are 50,000, and the capital injected by the owners and investors is 30,000, then the balance of 20,000 must be found from debt such as start up business loans, supplier credit, lease finance etc.
In return for injecting the startup capital, the owners and investors receive a percentage of the equity of the business, and make a return on their investment either by way of capital appreciation when the business is sold, or by way of dividends paid out by the business.
The amount of equity each party receives in return for their startup capital is complicated by the fact that the founders need compensating for their efforts and ideas (sweat equity) and 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.
In addition outside investors will want to know the estimated return on their investment before investing and the return on investment calculator will help to compare alternative scenarios.
The level of business startup financing you can raise will depend on many things including, the type of business, its current state, and its potential for growth. There are several potential sources to consider when looking how to raise capital for a startup business, but remember that the more startup capital you raise the more of your business you will need to give away.
Potential sources for small business startup capital include:
- Personal savings
- Friends and family
- Crowd funding and peer to peer lending
- Angel investors
- Venture capital
Our blog post on how to finance a business gives more background information on how to fund a startup and finding startup 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 usually recommend business startup capital is estimated and included in the start up costs calculator under the heading of owner or investor capital. This start up costs 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 will form part of the startup funding of the business, and be included in the opening balance sheet under the heading of capital.
There is however, nothing to stop a business starting the financial projection on day one before injecting any start-up capital, with a zero opening balance sheet and including all the startup capital as new capital in the cash flow and as capital in the balance sheet for year one.
Remember, the main aim of this task is to estimate the total startup business capital available to get the business of the ground and to make sure you have the required debt funding in place to fund the balance of the startup costs before you start.
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.
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 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 BSc from Loughborough University.