How to Calculate Startup Debt Finance

Startup Debt Finance

Startup costs need to be funded through a combination of owners capital, supplier credit, and debt finance. This can be seen from our start up costs calculator. The calculator shows startup expenses and assets on the left side matched by the startup funding on the right side.

Startup costs = Capital + Supplier credit + Debt finance

It is unlikely in a startup business that suppliers will grant substantial credit terms before the business has started trading. Consequently having estimated the amount of startup capital available, the balance will need to be funded by debt finance.

For example, suppose the startup costs are 100,000, and the capital available from investors is 60,000. Additionally suppliers give credit of 5,000. In this case the balance of 100,000 – 60,000 – 5,000 = 35,000 will need to be funded by startup debt finance.

Start-up debt finance can take many forms, for example, startup business loans, personal loans, bank loans, and overdrafts. The cost of having start-up debt finance is the interest which needs to be paid. However, the advantage of debt finance is that it does not require equity in the business to be given away.

Startup Debt Finance in the Financial Projection

Having calculated the necessary startup debt finance, 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 suggest startup debt finance is estimated and included in the start up costs calculator under the heading of debt. This template also deals with other forms of funding, and provides an opening balance sheet for inclusion in the financial projections template.

startup debt finance costs template

The startup debt finance included in this calculator forms part of the startup funding of the business. This funding is included in the opening balance sheet under the heading of debt.

In addition, the number of years over which the opening debt finance is to be cleared is included in the financial projections template. For example, suppose the opening balance sheet debt finance is 15,000 and the term is set at 3. In these circumstances the opening debt will be repaid over the next 3 years at the rate of 15,000 / 3 = 5,000 per year.

Finally, the cost of having the debt, the interest, needs to be calculated. This is done by taking the average of the opening and closing debt balances and multiplying by the interest rate.

Alternative Approach

There is however, nothing to stop a business starting the financial projection on day one before any start-up debt finance, with a zero opening balance sheet. In this case all the start-up debt finance is included as new debt in the cash flow for year one.

Remember, the main aim of this task is to estimate the total start-up debt to get the business off the ground. This ensures the business has the required funding in place to fund the start-up costs. Whether start-up debt finance is included in the financial projection as part of the opening balance sheet or as part of the year one cash flow is a secondary issue.

What’s the Next Step?

The next step in producing a five year financial projection is to enter the fixed assets opening balance in the opening balance sheet of the projection.

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 projections for a business plan.

Last modified September 5th, 2023 by Michael Brown

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.

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