START UP CAPITAL(START UP BUDGET) AND ITS

SOURCES

Startup capital refers to the money that is required to start a new business, whether for office
space, permits, licenses, inventory, product development and manufacturing, marketing or any
other expense. Startup capital is also referred to as "seed money."

The money can come from a bank, in the form of a business loan; or from an investor, group of
investors, or venture capitalist(s). In the case of a bank loan, the business will be expected to
make monthly payments to pay down the debt plus any interest and/or fees. In the case of an
investor, he or she will negotiate to provide that startup capital in exchange for a certain stake in
the company.

START UP BUDGET

There are numerous costs to take into consideration prior to establishing a business, and without
the appropriate research, many items can be inadvertently left out. Prior to receiving funding for
a loan from a bank or investor, it's common for parties interested in investing or loaning money
to you and your new business to request an itemized list of income and expenses during an initial
period.

A start-up budget is an itemized list of income and expenses for a new business, which often
covers the period up to commencing operations and perhaps a small amount of time after
operations have commenced.
How To Create a Business Startup Budget

One of the most important tasks the new business owner must tackle is to create a budget for the
new company, so you can see expected income and expenses and cash needs. Your budget is also
a key component of your startup business plan.

Since you have no past information to go on, you must create the budget using your best guess
on income and expenses (otherwise know as a profit and loss statement).

This "how to" will focus on business with an inventory of products but it will also discuss a
service business with no products.

Before you begin, consider why you need to spend the time to create a budget. Even if you don't
need bank financing, creating a budget is still a valuable exercise for any new and continuing
business.
Business Startup Budget - Step by Step

Startup capital includes funds for any expenses to be incurred before launching the company, and
capital required after launch to run the company until it reaches positive cash flow -- when
revenues are higher than expenses. Accurately estimating the capital required to start the
company is critical because running out of capital can cause the company to fail in its very early
stages. With careful estimates based on sound assumptions, the chances of a cash shortfall are
reduced.

Step 1- Complete your strategic marketing plan.

Describe the products and services you will be offering, and the strategies you intend to deploy
to introduce them to the market. Determine when each strategy will be implemented, such as the
schedule for advertising and what media you intend to use.

Step 2- Calculate product development costs.

Consult with your vendors or suppliers, and obtain estimates of what these costs will be. Work
out precise estimates rather than wide ranges.

Step 3- Prepare a marketing budget.

The strategic marketing plan provides you with information about what your marketing tactics
will be. Now attach numbers to these tasks based on consultation with vendors you have selected
and researching what other companies in your industry typically spend.

Step 4- Put together a personnel budget.

Forecast the number of employees and management team members you will need for the first
three years. Break this out by department so you make sure you don't overlook any functional
areas.

Step 5 - What do you need "day one" of your business?

Begin by determining what you will "day one" of your business, in order to open the doors (or
take your website live) and begin accepting customers. A start-up budget can be broken down
into four categories (depending on your situation, some of the categories may not apply to your
business.) The first category is fixed assets (facilities and equipment) needed to set up your
location; the second category is other startup costs.

Facilities.

Determine how much space your venture needs to conduct operations. This can be office space,
retail space, and production and warehouse space depending on the type of company. Ask real
estate professionals for information about the rate per square foot for the type of space you will
need. This section includes lease security deposits, furniture and fixtures, tenant improvements,
and signage.

Equipment, including office furniture, computers, and equipment and production and shipping
equipment and machinery.

Continuing with start-up costs:

Materials and supplies, for your office and production areas and a supply of start-up advertising
and promotion materials.

Other costs, like initial attorney and accounting set-up fees, licenses and permits, insurance
deposits, and fees to set up your business type.
Include items you are contributing to the business, like a computer and office furniture. Note
these items so you can get credit for them as collateral.

Step 6- What are your monthly fixed and variable expenses?

Gather information on your fixed expenses each month. These are expenses that don't change,
and aren't dependent on the number of customers you have. Here is a list of the most common
monthly fixed expenses:

 Rent

 Utilities

 Phones (business phones and cell phones

 Credit card processing - monthly fee for service

 Website service fees

 Equipment Lease Payments

 Office Supplies

 Dues/Subscriptions

 Advertising, Publicity, and Promotion commitments, like phone book, online ads

 Business insurance

 Professional fees (legal and accounting)

 Employee Pay/Benefits
  Misc. Expenses

 Business Loan Payment

Then add variable expenses. These are expenses that will change with the number of customers
you work with every month. These might include:

It will be easiest to get a cost per unit sold for the next step.

 Commissions on sales

 Production costs

 Raw materials

 Wholesale price of goods to be re-sold

 Packaging and shipping costs.

Step 7- Separate out the costs that will be incurred before launching the company from
those that will be incurred on an ongoing basis after the company is launched.

Step 8 - Estimate Monthly Sales

Complete a revenue forecast. Build financial models with assumptions about unit sales volume
and price, and then generate a spreadsheet with forecast revenues, month by month for the first
three years. Total up the expenses you forecast for each of these months, and calculate how long
it will take for the company to reach breakeven cash flow. Total the cash deficit for these months.
This is probably the most difficult part of a budget, because you don't know what sales will be
for a new company. You might want to do three different sales projections:

 Best case scenario, in which you show your most optimistic estimate for first year sales
  Worst case scenario, in which you show your least optimistic scenario, with very little
sales during the first six months to a year

 Likely scenario, somewhere in between. The likely scenario would be the one to show
your lender.

Include a calculation of collections percentage

To be realistic in your budgeting, you must assume that not all sales will be collected. Depending
on the type of business you have and the way customers pay, you might have a greater or smaller
collections percentage.

Include a collections percentage along with your estimate of sales for each month. For example,
if you estimate sales in Month One to be $50,000 and your collection percentage is 85%, show
your cash for the month to be $42,500.

Calculate variable costs of sales for each month based on sales for the month. For example, if
your estimated sales for a month are 2,500 units and your variable costs are $5.50 per unit, total
variable costs for the month would be $13,750.

Add monthly variable costs to monthly fixed costs to get total monthly costs (expenses). You
might want to calculate your break-even point to include with your budget.

Step 9- Create a cash flow statement

Combine by combining total costs with total sales and collections for each month. The monthly
totals will look something like this:

 Monthly sales $50,000

 Collected $42,500

 Total fixed costs $26,900

  Total variable costs $13,750

 Total cash balance $2,150

The $2,150 represents your total cash balance for the month, not your profit.

Step 10- Compute total startup capital.

By changing your sales figures using the three scenarios above, you can see the result in your
cash balance at the end of each month. This cash balance can give you information about your
cash needs and how much you might need to borrow for working capital. Add up capital needed
prior to launch and the capital required to fund the cash deficit. This is your total startup capital.

Tips for Creating Your Business Startup Budget

1. Use your accounting software program to create your budget, so you can use existing
accounts and make changes more easily.

2. If you don't have an accounting software program, you can use a spreadsheet program.

3. Most lenders require three years of cash flow statements on a month-by-month basis, and
three years of quarterly and annual Income Statements (P&Ls).

4. Income taxes are a variable expense, and you don't know what taxes you will have to pay
until you calculate your net income. Don't include taxes in fixed expenses or variable
expenses but make these a separate category.

What You Need to Create Your Budget

 An accounting software program or spreadsheet program.

 Information on the costs associated with sales of products.

Sources of Start-Up Capital

Anyone who has ever wanted to start her own business realizes that the biggest limitation is not
having enough start-up business capital. Start-up capital is the funds a business owner will need
to finance the production of a good and the sale of that good until the business reaches a break-
even point. Over half of all business fail within the first two years of operation, mainly due to the
lack of capital to keep them running. Every business will need capital in order to start or to
finance it during its formative years. Most entrepreneurs find money through banks, private
investors (friends, family and business associates), suppliers, customers or professional angel
investors. The source you choose determines how you raise the money as well as how you pay it
back. Here's a breakdown of your options:

1. Personal investment

People start companies at different points in their lives. Some entrepreneurs

start companies during the early stages of their career. A majority of entrepreneurs start
companies at later stages in their lives and these entrepreneurs often have personal assets
that they could use to finance their ideas. It is important for entrepreneurs to invest their
personal savings in their business ideas as it indicates that the entrepreneur is confident
about his or her own idea, thereby encouraging other investors to look at the idea more
seriously. After all, who would want to invest in a company wherein the founder does not
want to bet on the idea? Additionally, entrepreneurs who do not put their personal savings
into the venture can find it hard to raise money from friends and family. Entrepreneurs
should think thoroughly before investing their personal finances. If the business idea is
not feasible, the entrepreneur loses everything.

When borrowing, you invest some of your own money—either in the form of cash or
collateral on your assets. This proves to your banker that you have a long-term
commitment to your project.
2. Friends and Family

Finding friends and family who will invest in your start-up is straightforward: Start calling.
You're after high-net-worth investors who take personal referrals seriously. The best way to
find them is through personal networking. Friends and family are important sources
for financing startups since they would like to see the entrepreneur succeed. Such loans can be
obtained quickly as this type of financing is based more on personal relationships than on
financial analysis. However, friends and relatives who provide business loans sometime feel
that they have the right to offer suggestions concerning the management of the business. Their
suggestions might be orthogonal to the entrepreneur’s strategy and might create fissures in the
relationships. It is important to minimize the chance of damaging important personal
relationships. Therefore, entrepreneurs should plan on repaying such loans as soon as possible
even if the business idea fails, thereby ensuring that relationships are maintained.

When borrowing love money, you should be aware that:

 Family and friends rarely have much capital.

 They may want to have equity in your business; be sure you don't give this away.
 A business relationship with family or friends should never be taken lightly.

3. Bank loans/ Debt Financing

Banks are a straightforward source of funds. Bank loans are the most commonly used source of
funding for small and medium sized businesses. Many offer small-business loans if you've
already started your business. Consider the fact that all banks offer different advantages, whether
it's personalized service or customized repayment. It's a good idea to shop around and find the
bank that meets your specific needs.

You'll need a business plan and perhaps a personal guarantee. The funds are a loan, so you must
generate enough cash to cover loan payments. In general, you should know bankers are looking
for companies with a sound track record and that have excellent credit. A good idea is not
enough; it has to be backed up with a solid business plan.
You can find banks via the phone book, the Web and TV as well as Entrepreneur.com's
listing Best Banks for Small Business listing. Banks seem to be desperate for customers these
days.

Debt Financing
Entrepreneurs can also raise capital from banks through the debt financing route. Although some
angels provide debt capital, commercial banks are the primary providers of debt capital to small
companies. Bankers tend to make business loans through lines of credit, term loans and
mortgages. A line of credit loan is the largest amount of money that the borrower can obtain from
the bank at any one time. An entrepreneur must work with a bank in advance to obtain a line of
credit before the company needs the money because if banks do not know the specifics of their
investment, they will refuse credit. Attempts to obtain line-of-credit loan instantaneously are
generally ineffective. In addition to the line-of-credit load, banks issue five to ten year term loans
that are generally used to finance equipment. Since the economic benefits of investing in
equipment extend beyond a single year, banks are generally open to lending money to buy
equipment that generate revenues, which match the interest to be received from such a loan.
Finally, entrepreneurs can also obtain a mortgage to provide funding. Mortgages are loans for
which certain items of inventory or other properties serve as collateral. Debt financing has its
own set of advantages and disadvantages. Although debt financing increases the potential for
higher rates of return on investment (ROI) and allows entrepreneurs to retain much of the board
control, it also puts entrepreneurs at greater risk. Irrespective of the startup’s outcome, banks
make sure that they will get their investment back along with interests. To accomplish this, banks
structure their agreements accordingly.

4. Equity Financing

As opposed to debt financing, equity financing transfers the risk from the entrepreneur to the
investors, but has its own set of drawbacks. Equity financing is when entrepreneurs can raise
money only through selling common or preferred stock to investors. This implies that an
entrepreneur gives up some of his or her voting rights to investors. Although most angels offer
equity financing, institutional venture capitals make the biggest equity financing investments.
Institutional venture capital firms usually manage large funds - anywhere from $25 million to $1
billion - and invest in high growth companies. When a VC firm invests in a company, the firm
generally takes a seat in the board of directors. VCs assist the entrepreneurs in taking the
companies forward. The very same VCs do not mind firing everyone, including the founders and
shutting down the company if they determine that it is economical. In addition, raising venture
capital is generally a long shot. Venture capitalists will not even look into a business plan unless
the company meets some of firm’s criteria.

5. Grants and subsidies

The government can also help. The SBA can point you toward many different funding sources as
well as give you assistance with the legal and administrative aspects of starting your business.

It's not always easy to bring innovations to light so government agencies provide aid to
companies. You may have access to this funding to help cover expenses, such as research and
development, marketing, salaries, equipment and productivity improvement.

Technically, a grant is a sum of money conditionally given to your business that you don't have
to repay. However, you're bound legally to use it under the terms of the grant, or otherwise you
may be asked to repay it. As well, once you are granted money from one government source, it is
not uncommon to receive further funding from the source if you meet program requirements.

Criteria

Getting grants can be tough. There may be strong competition and the criteria for awards are
often stringent. Generally, most grants require you to match the funds you are being rewarded
and this amount varies greatly, depending on the granter. For example, a research grant may
require you to find only 40% of the total cost.

Generally, you will need to provide:

 a detailed project description, including location

 an explanation of the benefits of your project
  a detailed work plan with full costs
 details of relevant experience and background on key managers
 completed application forms when appropriate

Most reviewers will assess your proposal based on the following criteria:

 Significance
 Approach
 Innovation
 Assessment of expertise
 Need for the grant

Some of the problem areas where candidates fail to get grants include:

 The research/work is not relevant.

 Ineligible geographic location.
 Applicants fail to communicate how their ideas will be addressed.
 The proposal makes without a strong rationale.
 The research plan is unfocused.
 There is an unrealistic amount of work.
 Funds are not matched.

6. Suppliers and Customer financing

Suppliers and customers may also back you. If your product complements a supplier's, they
might invest--for example, if you distribute its music, a record label might want to invest. Be
careful, though: Taking money from a supplier may prevent you from using that supplier's
competitors. Strategic investors get their return in many forms: increased sales of their own
products, stock sale of your company, advertising through your distribution channels, etc. These
arrangements are rarely made just for a cash return, so the payback can take many forms.

At times, large corporations or potential customers finance the entrepreneur through debt or
equity routes. Large corporations provide financial and technical assistance to smaller businesses
because as larger corporations downsize their operations for tactical reasons, it becomes
important that their suppliers, frequently small firms, stay healthy. Examples of large
corporations that have historically invested in smaller firms include giants such as JC Penny,
Ford Motors, Motorola, Micron, and Cisco.

7. Angels Investors

A large number of individuals invest in a variety of entrepreneurial ventures. They are affluent
people such as successful entrepreneurs, lawyers, physicians, etc. who have moderate to
significant business experience. This type of financing is called as informal capital because these
individuals do not make such investments in established market places. Such investors are called
business angels. Angels are generally wealthy individuals or retired company executives who
invest directly in small firms owned by others. They are often leaders in their own field who not
only contribute their experience and network of contacts but also their technical and/or
management knowledge. Angels tend to finance the early stages of the business with investments
in the order of $25,000 to $100,000. Institutional venture capitalists prefer larger investments, in
the order of $1,000,000.

In turn for risking their money, they reserve the right to supervise the company's management
practices. In concrete terms, this often involves a seat on the board of directors and an assurance
of transparency.

Angels tend to keep a low profile. To meet them, you have to contact specialized associations or
search websites on angels. Private angel investors invest much like professional VC firms. You
pitch them with a business plan and financing pitch. They invest for equity and expect a return--
IPO, acquisition or stock buy-back--in three to seven years.

Networking is critical here, and you need to find angels who understand your industry and share
your passion.

8. Business Incubators
A start-up incubator is a company, university or other organization that ponies up resources–
laboratories, office space, consulting, cash, marketing–in exchange for equity in young
companies when they are most vulnerable. Business incubators (or "accelerators") generally
focus on the high-tech sector by providing support for new businesses in various stages of
development. However, there are also local economic development incubators, which are
focused on areas such as job creation, revitalization and hosting and sharing services.

Commonly, incubators will invite future businesses and other fledgling companies to share their
premises, as well as their administrative, logistical, and technical resources. For example, an
incubator might share the use of its laboratories so that a new business can develop and test its
products more cheaply before beginning production.

Generally, the incubation phase can last up to 2 years. Once the product is ready, the business
usually leaves the incubator's premises to enter its industrial production phase and is on its own.

Businesses that receive this kind of support often operate within state-of-the-art sectors such as
biotechnology, information technology, multimedia, or industrial technology. Businesses that
were supported by an incubator have a better success rate over 5 years.

Whichever sources you choose, decide in advance how much money you want from them and
how you intend to repay it. And be realistic! I've seen entrepreneurs make up a story to get the
money, only to be surprised four years later when the investors start demanding a return.
Professional investors rarely walk away from an investment, so if you write the deal knowing
how you'll provide the return, you're much more likely to reach a happy ending.

SOUCES OF START UP CAPITAL IN PH

FINANCING

Start-up businesses can get capital by seeking loans from formal lending institutions like banks/
rural banks, cooperatives or Micro-Finance Institutions (MFI's). Learn more financing
institutions.

However, some budding entrepreneurs don't access conventional financing because of fear of
documentary requirements, lack of collateral, or inexperience. They end up digging into their
savings, maxing out their credit cards or mortgaging their homes. In fact, home-equity loans are
one of the most popular borrowing routes.

There are other ways of getting capital funding:

 Own savings

 Borrowing against your insurance policy -- provided it is a cash-value life insurance. It

cuts the value of your insurance benefit, but if you're relatively young, you'd still have a
long time to pay it back. Interest rates typically run in single digits.

 State pension funds -- If you're an employee, you can also access other sources of low-
cost cash through your state pension funds ; SSS or GSIS salary loans or a PAG-IBIG
Fund multi-purpose loan. They usually let you borrow at the prime rate, but PAG-IBIG's
interest is relatively the lowest.

 Family loans -- Lastly, you could always try to borrow from your family or relatives, but
use this only as your last resort, since there is risk of starting a family feud. Doing
business with family is still doing business, so remember to put everything on paper to
avoid unnecessary complications.

 High-interest loans -- Pawnshops are also viable sources of funding, and are very
accessible. But starting a business is a serious venture and it's hard to start one using a
high-interest loan as capital. Another popular non-formal way to get funding, but which is
discouraged, is through five-six loans. This means for every five pesos you borrow, you
pay back six pesos after just a few days. Effectively, it is said to be more than 1000%
interest rate on an annual basis. So ask yourself if you want to borrow at that rate when
 you start a business.

Keep in mind that money is not the only capital that you have. Your business skills your capacity
for marketing, people and social skills, technical expertise, even your connections can be used as
capital for your business. Sometimes, by being resourceful, you lessen the need for loans and
other expenses.

Aspiring entrepreneurs should start small, but dream big. Starting small minimizes the financial
exposure and the risks involved in business start-ups. In fact, many successful entrepreneurs
nowadays have their inspiring stories to share as most of them started small, either from one
small store or peddling operations. By learning from their mistakes and keeping true to their
vision, they were able to overcome obstacles and grow their business. Because of their
determination, creativity, forecasting skills, and vigilance in reinvesting their profit into the
business, these icons and role models have shown that it is possible to become successful.

SPONSORED LINKS

 Citibank's Guide to Building Personal Wealth -- Written with Asian Pacific readers in
mind, this book contains pieces of personal, financially sound information and introduces
key concepts and wise practices on money management.

 SME Business Loans from BPI Family Savings Bank - Make your business prosper
with financing offered specially for SMEs.

 Learn more on how to grow your business with BDO SME Loan Equip yourself with
the right business tools to maximize the potential of your business

FINANCING INSTITUTIONS
Need capital? Below are links to resources on funding and financing organizations from both
private and public sector.

Financing Resources

 Financing Programs for MSMEs handbook -- Learn about the different government
agencies that offer funding for micro, small and medium enterprises by downloading this
handbook compiled by DTI .

 Financing Frequently Asked Questions c/o DTI

 Small Business Corporation -- Formerly known as the Small Business Guarantee and
Financing Corporation, this government financing institution has more than 16 credit and
credit programs, including micro financing through rural and cooperative banks,
through NGOs and cooperatives, and through microfinance institutions (MFIs).

 MFI Search Engine -- Find the nearest microfinance institution in your province by
searching through the People's Credit and Finance Corporation database.

Locate MFIs via SMS: If you're a Globe subscriber, you can also text MICRO FIND [Province],
[Town] (ex. MICRO FIND PAMPANGA, LUBAO] and send to 2973 (Php 2.50/text).

Financial Literacy Resources

 Colayco Foundation Led by personal wealth and finance guru Francisco Colayco, the
Foundation works towards empowering Filipinos through books, seminars, media
campaigns, and programs on financial literacy.

 Financial Planner (PDF) This Financial Planner is a learning tool used by IOM and its
partner NGO, ATIKHA, in financial literacy training of migrant worker groups, family
circles, diaspora communities and trainors from different sectors in order to promote wise
spending, savings and investment from migrant remittances.