We have all heard stories of someone starting a business in their garage with $1,000 in capital and growing it into a billion-dollar company. While it is technically possible, you are probably more likely to win the lottery than to replicate that level of success with such little capital.
The top reason new businesses fail is lack of capital. In layman’s terms, they run out of money. I am often asked how much money is required to start a business. I used to answer that question by explaining it is impossible to say without knowing a lot more about the business you intend to start, your business plan, etc. Now I simply answer, “more than you plan on.”
It is possible to start a business with very little capital. For example, with a small investment, you can open an Etsy shop, or your own Shopify website, and sell items you make at home. Millions of people do that every
year. They are often called side gigs because they don’t generate enough cash flow to allow you to quit your day job.
When I left my corporate job, I was not looking for a side gig. I needed a business that would eventually support me and my family and hopefully grow into much more. At the time, my wife didn’t work outside the home, so my salary was the only income we had. I knew I needed enough capital to not only fund the business for a couple of years but also to provide our family with things we had grown accustomed to like a roof over our heads and food on the table. I was leaving behind a nice six-figure salary and for this venture to make sense I needed to eventually replace it with similar income from the business.
I was fortunate in that I had saved enough money that I didn’t need to borrow any of my initial capital. That was a good thing because I learned early on that banks love to lend you money when you don’t need it, but aren’t interested when you really need it. It is nearly impossible to get traditional financing when starting a
business. That is why so many new entrepreneurs rely on savings, 401Ks, family, and friends for their initial investment.
Fortunately, the capital needs I had forecasted in my business plan were fairly accurate. I had enough money to get the business up and running and to support my family for the first few years. I assumed by year three I would be able to start taking money out of the business. However, what I didn’t account for was the capital I would need to grow the business. Watching your business grow is both rewarding and expensive. By year three I realized that I couldn’t pull profit out of the business because I needed it to fund more employees, more inventory, more equipment, larger office/warehouse space, etc. Fortunately, by then I had a long enough track record that the banks were willing to lend me money. I hated taking on debt, but it was either that, or give up some equity, or stop eating. I ended up opening revolving lines of credit at two banks to allow me to fund my growth and still pay myself enough to live on.