Entrepreneurs have access to numerous financing options to help launch their small businesses. However, the fact of the matter is, you need some money in the bank before you can realistically take the leap. How much, exactly, will vary depending on your business.
Although the specific financial requirements of each business will differ, there are some good rules of thumb to follow when it comes to savings. As you build a small business budget and calculate your estimated startup costs, keep these savings guidelines in mind.
Cash injection for SBA loans
Many entrepreneurs have to take on at least a small amount of debt to launch their businesses. However, not even loans are “free” from the start. You still have to have money saved for a personal cash injection with each loan.
Cash injections (also called equity injections) serve as “down payments” on your loan. Essentially, they help prove to the bank that you have money saved and will be able to pay your loan back. Cash injections are typically required of all new business owners applying for 7(a) loans through the Small Business Administration.
For most SBA 7(a) loans, owners will need to produce a 20% cash injection for a startup and an additional 10% in post close liquidity that doesn’t have to be used (just demonstrate you have it and aren’t starting out with zero cash). This means that you’ll need to save between 10–30% of the loan amount you’re requesting before your loan is even approved.
Retirement savings for ROBS
Rollovers as Business Startups (ROBS) are another great financing option for entrepreneurs. This method, too, requires you to have money in the bank. However, the difference is that ROBS uses retirement savings you’ve accumulated over time.
Using ROBS, you can roll over an existing retirement account from a previous employer and use those funds to invest in your new business. The process does come with some fees. You’ll want to work with a third-party administrator (TPA), who will require a fee to set up and manage your account. In order to make these fees worth it, most TPAs recommend that you plan to invest at least $50,000 through ROBS. This means you’ll need to have saved $50,000 or more in the account you’re rolling over.
As an added bonus for ROBS-funded businesses, you can use rollover funds to satisfy the non-borrowed equity injection and post-close liquidity required by the lender.
Startup costs are not the only expenses you need to worry about when launching your small business. If you plan on running your business full-time, you’ll likely need to quit your current job. Unfortunately, it might be a few months until you can pay yourself a real salary from the new business.
To help you navigate this transition, it’s smart to save at least 6 months of living expenses before you launch. This gives you a financial cushion and allows you to focus on building your business without worrying about paying yourself a salary.
Launching a business involves a lot of complicated processes, but securing financing doesn’t have to be one of them. The team at Tenet Financial Group has decades of combined experience linking entrepreneurs to startup funding. Reach out today to explore our financing products.