Depending upon the nature of the enterprise, it can take a good deal of money to launch a business. A new or expanding business must have access to an adequate amount of capital to fuel its growth. One of the biggest challenges for a business is to accurately determine how much money is needed to start and operate the business before it begins to generate positive cashflow. The next hurdle is to find one or more sources for the funds at reasonable terms. Banks generally do not finance start-up businesses.
Most businesses obtain their initial financing from personal sources, friends and relatives.
There are many ways to categorize capital, but two of the more important distinctions are between start-up vs. operating capital , and debt vs. equity . It is also advisable to include the initial year or two of operating costs as part of a start-up package, because most businesses will not be profitable enough to fully support their expenses and growth from operating income in the first couple of years. Therefore, start-up costs might additionally include the first two years of labor costs , rents , and one to two years of raw materials costs . Another important distinction to make is to recognize the difference between debt and equity. While both are legitimate and necessary sources of capital, it is very difficult to start a business solely from borrowed funds, which are debt.