Let’s say you went $100,000 in debt starting a business, and it costs $5000 to operate every month and you make only $4000 every month for the first year.
But you have a house and family, etc.
Where is the money going/ coming from??
In: Economics
Sounds like your business model isn’t working very well. Maybe reconsider the business you’ve gotten into.
You operate the business.
You pay yourself $100,000
You pay $900,000 in materials
You pay your staff $240,000 in total
Your business makes $1,000,000 but is valued by outsiders to be a profitable venture at $2,500,000. You take a loan against your valuation and continue growing the business.
You have the wrong idea about starting a business.
u/Truthkeeper is totally right. You just take the loss and live off your savings. You don’t just start a business and make that your income. The losses you take to keep operating at the start are just like the “losses” to buy ovens, a property, trained dolphins, or whatever is needed to get your business even open for Day 1.
It’s not like on TV where people start a business and that’s their new income, pretty much every new business is a giant pile of loss until they recover all their startup expenses. Of course any business hopes to have a steady stream of customers, but a steady stream is never gonna have you making profit right after the large investment to to get started.
It depends how the business is structured. One important thing to note is that an owner is often an employee, so they will get paid a salary. This means part of the $5000 it costs to operate will be going to pay their salary.
Outside of that, it’s generally one of 4 ways:
1. Savings. If a company isn’t going well yet, but the owner believes in it, they might keep pumping their own cash into it.
2. Investors. If a company isn’t going well yet, but other people believe in it, they might pump their cash in, I’m exchange for future profits. The owner can pay their salary out of this, and depending on how strict the investor is, thisncould be a lot of money.
3. Debt. There’s multiple ways this can work, but the company can take on debt, either through a bank loan or issuing bonds, and use the to pay expenses including the owners salary. Alternatively, the company may choose to pay it’s owners salary over other bills.
4. Personal Loans. If you own a company that is losing money, but people think it has the potential to become really successful (such as Amazon back in the day), banks will loan you money secured against your shares. This means if you don’t pay the loan back, you’ll give some of the company to the bank. This is how most owners of big companies live, because it works as a tax dodge.
Most businesses are built on credit. Credit can come from savings, friends, family or banks. You float until youre profitable. People that go into business usually dont have anything to lose or some money saved up to cover day to day expenses to a certain point. You dont need a lot to start something. If you have a decent product, service, or plan, things can just snowball and bring in cash and you can use that number to gain more credit to float or use the credit/cash to improve the business and gain more revenue. Any business bringing a 1k in revenue is worth something in someones eyes. Theres potential to take to make more if there are buyer in some shape or form.
Loans or raining capitals. Not all businesses profit in the first few years and some businesses plan to not profit for a few years. Also you don’t pay taxes on debt.
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