How to Calculate Startup Debt Finance

Startup Debt Finance

Startup costs need to be funded through a combination of capital injected by the owners and investors, supplier credit and debt finance. This can be seen from our start up costs calculator which shows startup expenses and assets on the left hand side matched by the startup funding on the right hand 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, so having estimated the amount of startup capital available, it is possible to calculate the balance that will need to be funded by debt finance, such as startup business loans.

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

Startup debt finance can take many forms, for example, startup business loans, personal loans, bank loans, and overdrafts. The cost of having startup debt finance is the interest which needs to be paid, however, the advantage is that debt finance 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 usually recommend business startup debt finance is estimated and included in the start up costs calculator under the heading of debt. This start up costs 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 will form part of the startup funding of the business, and be 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 should be included in the financial projections template. For example, if the opening balance sheet debt finance is 15,000 and the term is set at 3, then 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, is also calculated by taking the average of the opening and closing debt finance balances and multiplying this by the interest rate.

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 and including all the startup debt finance as new debt in the cash flow for year one.

Remember, the main aim of this task is to estimate the total startup debt finance to get the business of the ground and to make sure the business has the required funding in place to fund the startup costs. Whether startup 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 for your business plan using our financial projections template is to enter the fixed assets opening balance in the opening balance sheet of the financial projection.

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 projections for a business plan.

Last modified January 17th, 2020 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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