How much money do I need to save for my new business to take off without a hitch?

November 7, 2007 9:14 AM

How much money do I need to start my business? And am I foolish to think I will be able to do this??

I'm planning to start a private investigating business in early-mid 2008. Before it happens, my partner and I will move from San Francisco to Eugene, OR (she's hopefully going to be attending grad school at UO). Our cost of living will decrease substantially, but she will most likely have a limited income, so I am fully expecting money to be tight for a little while.

My question is this: How much money do I need to save up in order to focus all my efforts on my new business once we're in Eugene?

The business will be low-cost to start-up - I've estimated about $3,000 will go into licensing fees, a new computer, etc. Moving fees have been estimated at about $1,200.

(I should mention here that my business will be a sole proprietorship, I will be working from home, and most of my work will be done online. I'm not the field investigating type of P.I., I'm the public records research P.I. with a librarian background. The main focus of my work will be background investigations and skip tracing.)

So, besides the estimated $4,200 needed to move and start my business, how much do you think would be necessary to have saved up before jumping into this head first? I'm not sure how much rent will be in Eugene, but I'm guessing maybe $800 a month for a 2 bedroom?

Should I look into small business loans, state funded grants, etc., or is that not a good idea?

Also, does anyone have any idea how much E&O insurance for this type of business might cost me?

posted by bacall423 to work & money (22 comments total)

E&O Insurance shouldn't be more than $100 per month. Don't forget business liability insurance.

I wouldn't look into a LOAN per say, but grants can work. Most grants in Oregon are for minorities or require your home/home office to be in a 'revitalizing' area, though... I didn't have any success as a 25 year old white guy getting grants.

Living in Eugene is cheaper if you live across the river in Springfield. The busses run to neighborhoods over there too.

The general advice given to people who are starting new businesses: Figure out how much you need to live for six months, then add 20%. When you've saved that amount, then you can start your business. Until then, keep your day job, and do your business on the side.
posted by SpecialK at 9:21 AM on November 7, 2007

I forgot to mention: I'm 25, have zero debt of any kind, and have so far saved about $2,000 to go towards my new business. I also have excellent credit (FICO over 800).

In case any of that matters. :)
posted by bacall423 at 9:23 AM on November 7, 2007

Generally good rule of thumb for starting a business: Have enough money to operate your business at a loss for a substantial amount of time. New businesses don't break even for between 8months and a year. So I would say you need enough money to operate both your business and your household for at LEAST 6 months. So for you that seems to be roughly 20,000usd. Although smart money would say you need double that.
posted by French Fry at 9:35 AM on November 7, 2007

$20,000?? Good God. There's no way I'd be able to save $20,000. It's hard enough to save a thousand a month living in San Francisco on a meager $48,000 salary. Yikes.

Maybe I should rethink the whole thing, huh?

Thanks for your responses so far! I do admit I'm feeling pretty discouraged now, though.
posted by bacall423 at 9:44 AM on November 7, 2007

How are you going to get clients? Will it be all advertising, and in what format? Once you've built a client base, advertising will probably be more a word-of-mouth thing, but in the beginning I can see that paying for ads might be spendy.

Can you work part-time at some job, and grow the business at the same time?
posted by rtha at 9:51 AM on November 7, 2007

If everyone followed French Fry's advice, no one would ever start a business because in order to start a business you would already have to be pretty well off. However, French Fry is right that it often takes a while for a new business to get off the ground.

This is why when people start new businesses they most often borrow money. You can look at your options for borrowing money. The lowest cost option is usually from friend's and family. However, the low interest rate can come with other strings attached. Your partner may be able to get student loans, but unless you are married it may be difficult to convince her that she should get loans to help finance your business. There are also banks and the Small Business Administration.

My main advice is to figure out how cheaply you could survive while your business was getting off the ground. You may be incredibly poor for a few months. You might also have to consider a part-time job in the evenings, while you are working to make your business get off the ground.
posted by bove at 9:53 AM on November 7, 2007

Don't be too discouraged. You could work a side job until you become profitable. It sounds like the work you would be doing could be fairly flexible. If you do get started, you should strongly consider forming an LLC. You can still file as a sole proprietor but you will gain important legal protection.
posted by itsamonkeytree at 9:54 AM on November 7, 2007

rtha: I'm hoping that most clients will come in the form of word-of-mouth, networking with other P.I.s (I expect that about 50% of my work will be directly with other P.I.s) and little actual "advertising." I intend to work for businesses, lawyers, etc. rather than the general public who are looking for their cheating spouse or long lost cousin.

I'm considering working part-time somewhere while building the business, yes. It might be absolutely necessary, considering what people have said so far about how much money I should reasonably save.

Thanks.
posted by bacall423 at 9:56 AM on November 7, 2007

itsamonkeytree: Thank you - I need to further research LLCs because I don't really understand them.

Would the tax benefits be better for a sole prop. or an LLC? (I hope to use my home office, etc. as tax write-offs)
posted by bacall423 at 10:00 AM on November 7, 2007

Revision: I am not suggesting you need to SAVE 20,000usd. Just that you need to consider that you’ll need a lot to cover all your expenses; Both business and personal because of your situation. I agree with Bove 100% about finding low interest loans to cover you finances. What I’m saying is just be sure to borrow Enough money, so that your awesome new business is not cut off at the knees by cash flow in your first year. Good Luck!
posted by French Fry at 10:03 AM on November 7, 2007

If you want to get a loan, you'll need to have a business plan. To make the business plan, you'll have to do some research that will answer most of your questions. e.g. How many clients can you reasonably expect to have at the start and how fast is the client base likely to grow and what can you expect your average income per client to be. (In short, if you could provide us with enough info to answer the question, you wouldn't be asking the question. :-)

Find an organization or government agency that gives advice to people starting a business and ask for help developing a business plan. This will get you a long way.
posted by winston at 10:10 AM on November 7, 2007

Bacall423, welcome to the site. Good on you for wanting to start a small business! Entrepreneurship can be very rewarding, but it is a LOT of time and hard work and planning and good luck.
Considerations:
- Odds are that you will not be able to make enough money to cover all your business startup expenses in the first year.
- How good are you at managing finances? Do you stick to your budget every month? Know any accounting concepts?
- You will have to pay for health insurance on your own.
- You need to write a business plan detailing your expected expenses, and what you want to do with your company
- Portland has http://www.jtresearch.com/ who might be able to give you insight on the market.
- Read: http://www.entrepreneur.com/bizstartups
- Read: http://www.aiip.org/
- Read: http://lifehacker.com/software/entrepreneurial/getting-to-done-roll-your-own-business-132637.php
- Read: http://www.sba.gov/
Best of luck to you!
posted by enfa at 10:18 AM on November 7, 2007 [1 favorite]

Do some digging into rents in Eugene. My impression is that houses are relatively cheap to buy, but that the rental market is pretty tight.
posted by Good Brain at 10:20 AM on November 7, 2007

I just finished a class on starting a small business. I can't encourage you enough to meet face-to-face with someone from the Small Business Administration.

Here's the information on the Oregon local office. And, in case the move doesn't happen, here is the information for the San Francisco district office.

An LLC's major benefit is limited liability. That means that if you have an LLC and someone sues you, they can't touch your personal assets, only the business ones. It's something to consider and you may want to speak with a lawyer who specializes in business structures.

We used this book for the class, and while it has its flaws, it also has software that lets you customize a business plan.

Again, speak with someone from the SBA.
posted by cooker girl at 10:23 AM on November 7, 2007

Having just started working for myself, let me suggest finding a good accountant. I found mine through word-of-mouth and he's made a big difference in getting me set up and conscious of how to structure things. You'll also want a copy of Quickbooks or something similar. The little I remember from my initial convo with the accountant (I haven't paid a dime yet, I guess he expects to make it all up come tax season):

1. The deductions around a home office (obviously)
2. Keep track of when you use your car for business
3. Consider putting your partner on the payroll, even for a small amount of work. This has multiple benefits. The one that stuck out to me was that if you need to buy your own health insurance, set it up in the partner's name (assuming you're married, I suppose) so it reduces your business income in addition to being an expense.

Be conscious of your quarterly taxes. Have a separate business account, business credit card, etc.
posted by yerfatma at 10:51 AM on November 7, 2007

There are no tax benefits for becoming an LLC. It is a legal distinction made by the state. An LLC can file as a sole proprietor, corp, S corp, or partnership. You still need to make that election with the IRS.
posted by itsamonkeytree at 10:56 AM on November 7, 2007

Find and talk to some other people who do this work. Should be easier since you won't be in their area and will not be a local competitor. You need to budget for marketing. You need a system for bookkeeping, billing and legal issues. You may need some form of liability insurance.

Go to the Small Business Development Center in your area and get their free expertise. I used their help when I bought a business years ago, and it was really worthwhile.
posted by theora55 at 11:57 AM on November 7, 2007

If you can do it, go for it.

If you don't, you'll always wonder what it would have been like if you did.

If you do, you'll at worst learn something and at best be amazed at what you can do when you're the boss.

These books have helped me as I worked to get a business off the ground:

The Art of the Start - Guy Kawasaki

The 4-Hour Work Week - Tim Ferriss (I take some of this with a grain of salt but found some of its principles useful in focusing my efforts)

Also, if you have an entrepreneurial friend or mentor, this could be useful for periodic check-ins.
posted by asuprenant at 12:48 PM on November 7, 2007

More wisdom:

It's not a lack of resources that hold you back, it's your lack of resourcefulness.

Deep. I know.
posted by jdgdotnet at 12:57 PM on November 7, 2007

There's a lot of good advise above. Right now I'm where you aim to be in a couple of months, workwise. The first few months are hard because no-one knows you and you have to build up the business from scratch. You can't count on any money coming in for quite some time while you're going to be spending it on bills, advertising etc (and, in my case, stock).

To be honest, I don't think you've got enough money saved (I started with $2K and it just didn't last long enough) but I think French Fry's $20k is a bit steep. Consider getting a side job to defray costs whilst still giving yourself the latitude to actually do your own work. It'll also give yourself a bit of padding when you're dealing with a skeletal budget (and that really helps when the "Maybe I should just throw in the towel..." comes a-knockin).

It's amazing how far you can stretch your money when you really have to, and it's also amazing how much you can do when it's YOUR business you're working hard for. I'm poor but independant, and I don't owe anyone a dime (so far). It's a great feeling. Will it be enough to make a living from? I don't know - I hope so. Even if I have to go back to being someone's wage slave, at least I tried.

Good luck!
posted by ninazer0 at 3:53 PM on November 7, 2007

You're going to leave your job, move to a new town (presumably with few business contacts), where you will be the primary breadwinner in your family, and you're going to try to start a new business with hardly any savings?

No, get a job that will allow you to continue saving. When you have a good cushion, then quit your job. $20,000 isn't a bad place to start. If you can get a job that will allow you to save $1000 a month, that's less than two years. Your business idea is not something that is in any way time-sensitive, so you can and should wait.
posted by kindall at 3:58 PM on November 7, 2007

I know small biz owners who have received excellent free advice from SCORE - the Service Corps Of Retired Executives. Just like it sounds, these are retired businesspeople who volunteer their time and expertise to help people just like you with small businesses.

I agree with those who recommend keeping some sort of "regular" job - with benefits - while you're getting things started. It might make you busier, but you'll be more secure while your new biz is taking off.
posted by altcountryman at 10:34 AM on November 8, 2007