If you want to successfully start a small business, there are many questions to be answered. What do I need to start a business? How much does it cost to start a business? What are the risks when starting a business? How to legally start a business? What is the best small business to start? Of course, there are many more important questions about starting a small business.
The most important question isn’t “How to start a small business?” The most important question is “How to start a small business that succeeds?”
There are two very important facts about successfully starting a small business:
#1 – There is a right business for you and there are a thousand wrong businesses.
There are many different types of business you can start. But, not all of them will be right for you. And, some of them will be dead wrong for you. Let me explain.
Years ago I have started a networking business. The business was growing. We had networking groups in three states and multiple cities. The business was growing. I should have been happy, but I was miserable. Why? Because it was the wrong business for me. Managing and growing the business wasn’t fun. To be honest, I hated it. After less than two years, I had to sell the business. The business is doing fine today without me. It is a business that is right for someone else. I don’t want the same thing to happen to you.
There is a right business for you. You can start a thousand different businesses, but it doesn’t mean that you should. Before you start a business make a self assessment to find out what is the best business for you to start. If you like open spaces, don’t start a business that requires you to sit in an office all day long. If you are not a people person, don’t start a business that requires constant face-to-face contact. If you love to travel don’t start a business that requires you to stay in one place.
Do you understand what I mean? Know your personality. Understand what you like and dislike before you start a business. If you start a business compromising on this, you will be unhappy. Not only that, but you will more likely fail too. Why? Because starting a business that is not a good fit will make everything harder.
#2 – Many businesses fail.
Unfortunately, a lot more businesses fail than succeed. According to the Bureau of Labor Statistics, about 80 percent of new businesses survive longer than one year. In addition, the Bureau also states that about 50 percent no longer operate after five years, and only about 30 percent survive to 10-years. According to Bloomberg, 80 percent of all businesses fail within the first 18 months.
A business can fail for many reasons. Most businesses fail for one or more of the following reasons:
- Unable to create a product or service customers are willing to buy.
- Fail to differentiate. It is not enough for a new business to be as good as the competition. When you start a new business you have to be better than the competition.
- Unfit to manage people and the business.
- Incapable to get new customers in a profitable way.
- Bad financial management.
I wrote this article to help you start a business and minimize the chance of failure.
Before you get into the technicalities of starting a business, you have to ask yourself a few questions.
Why do I want to start a business?
This is a very important question. Often, we refer to this as your “Why”. In order to succeed in business you must have a strong “Why.” “Why” is the true reason or reasons for starting a business.
The reason you must have a why is because it will help you endure. There are many reasons people start businesses. They are all driven by something. If your why isn’t strong enough, you will fail in business. It is that simple.
Starting a business because it looks kinda cool is not a good enough reason. Starting a business just because you want to be rich isn’t a strong enough why. Most successful entrepreneurs start businesses for one reason. Freedom. Freedom lives in many forms: the freedom to be your own boss, the freedom to work from home, the freedom to offer a service without compromises, the freedom to create your own rules, the freedom to work with people you like, and more.
Am I financially ready to start a business?
It is true that there are businesses that you can start with little or no money, but you still need money to pay your bills. You can simply asses if you are financially ready to start a business. First, you have determine your monthly living expenses. At the very least, you should have enough money saved to survive for 6-12 months without any revenue from your business.
If you have large credit card debts, you should pay them before you start a business. Student loans and other debts should be paid too. It might delay your efforts to start a business, but you will increase your chances of success.
Do I have the skills to start a business?
I am not referring to technical skills only. I am referring to skills you need to offer the services you want to offer and skills you need to build a business. It is best to start a business in an industry you have worked in before. If you just graduated from college, you are better off getting a job before you start a business. Even if you have technical skills, it helps if you have worked in a business before.
Let’s say that you have graduated from college with skills in computer science. You might know how to code, but you are not ready to start a software company. Why? Because a technical skill is not enough to build a business.
I recommend that you first get a job with a software development firm. Even if you only do this for one year, you will learn a lot. You get an insight into the daily operations of the business. You will interact with different departments. You get a basic understanding about how a business operates.
What problem am I solving?
What business are you in? What types of services or products are you offering? If you are unsure, stop there. If your business is not solving a problem, it cannot provide value.
Who is my customer?
As you are thinking about the problem you are solving, you must think about the customer.
Your customer will impact everything in your business such as the:
- Product or service you are offering
- Location of your business
You have to be very specific when you define your customer. You can’t paint with a broad brush here. You must have laser focus.
Define the customer the following ways, if you are a business to consumer business:
- Personality type
- Likes and dislikes
- Buying habits
- Market influencers
Define the customer the following ways, if you are a business to business company:
- Number of employees
- Decision making process
How do I get customers?
Once you know your product and your customer, you have to develop a marketing and sales process. Based on the customer profile you can develop a marketing strategy. You have to know how much it will cost to get a new customer.
Whether it is face-to-face networking, print advertising, direct marketing, SEO, content marketing or paid advertising, you have to come up with a marketing game plan.
Who am I competing against?
Your competition is a great place to learn about business. Not only that you have to know who your competitors are, you have to study them. You can learn more from your competitors than any other source.
Some of the most important things you will learn from the competition are:
- Where and how do they advertise? Do they advertise on Facebook or Google? Do they do direct mail advertising? Are they running radio or television ads?
- Do they exhibit at trade shows?
- How much do they charge for their services? You can learn about pricing from the competition.
- How do they communicate with their customers? What language do they use? Have they developed their own vocabulary?
- What do they do well? You can read customer reviews to find out what they think about the company.
- What do they need to improve? You can read reviews and complaints.
How is my business differentiated?
Once you have studied the competition you have to differentiate your business. If you are only as good as the competition, you will fail. If you just want to be less expensive than the competition you will fail. In order to succeed, you must truly differentiate.
Here are some ways businesses can differentiate themselves:
- Focus on quality. Every business talks about quality, but only a very small percentage offers excellent quality.
- Build a business around your ideals. Do you want a greener planet? Do you want more freedom? Do you want to create a product without compromises?
- Build a community. When you build a loyal following you no longer compete on price. Instead of customers you have fans. While customers will dump you, fans will follow you.
- Crush stereotypes. If you are in an industry with bad customer service, focus on exceptional customer service. If you are in a vertical with slow fulfillment, build a fast fulfilment business.
- Focus on a small niche. When you focus on a small niche you will become the go-to expert. If you are an accountant for construction companies, you will be better differentiated than someone who offers accounting services to all. As a result you will have less competition and you will be able to charge more.
- Listen to your customers. Your customers will tell you what they like and dislike.
- Become a thought leader. Instead of just another service business become an industry influencer. Publish articles, speak at conferences, attend trade shows, reach out to trade publications.
How much are business start-up costs?
One of the best things about starting a business is that it doesn’t have to cost a fortune. It is true that some businesses such as restaurants can cost hundreds of thousands of dollars to start. Other businesses like biotechs could take tens of millions. It is also true that you could start many businesses with no money.
The most important aspect of business start-up costs is to have a realistic idea. When you write a business plan one of the questions you must answer is: “How much does it cost to start a business?” The short answer is that it all depends on the type of business.
Let’s look at the start-up costs for three common business types:
- Brick and mortar
Here are some of the possible start-up expenses:
- Office or Business space
- Professional services such as attorneys, accountants, HR
- Market research
- Printed materials
Once you have made a list of what is necessary, you can get an idea of your start-up expenses.
Selecting the Business Entity for Your Business
There are three common business entities for a small business; sole proprietorship, limited liability company, or S-corporation. All of them are different with their own pros and cons. Which one is right for you? It depends on the type of business you are starting.
More than 70 percent of U.S. businesses are owned and operated by sole proprietors. It is a simple business entity. A sole proprietorship is great for a business owned by one individual. With this form of business entity the business is you. You are entitled to all profits, debts, and losses.
A sole proprietorship is the easiest to set up.. You only need to get a business license or permit and register your business with your local government. You don’t need to hire an attorney to set up a sole proprietorship.
A sole proprietorship is great for freelancers, consultants and independent contractors. It is a simple business entity that works for most small businesses.
What are the advantages of being a sole proprietor?
It is easy to set up. It is simple to maintain. There are no shareholders, partners or board members. You control the entity on your own. You control the money and make all the decisions.
Taxes are fairly simple. You report tax on business income through your own personal tax return. It is a simple process.
Also, as a sole proprietor, you don’t need to worry about board meetings, keeping minutes, and other bureaucracy.
What are the disadvantages of being a sole proprietor?
A huge disadvantage of a sole proprietorship is the liability issue. Before you choose sole proprietorship, ask yourself this question:
Am I willing to risk my personal assets in case I get sued?
As a sole proprietor, your personal assets are at risk. It doesn’t shield you from business liabilities. As a sole proprietor there is no distinction between you and your business. This means that you are personally liable for damages caused by your business. Yes, it is risky to be a sole proprietor.
As a sole proprietor you are responsible for all business debts and losses. A corporation is much better at shielding you from your business. Before you start a business, consider the risks involved with a sole proprietorship.
It is also very difficult to get a business loan as a sole proprietor. Most financial institutions require that you incorporate before they lend you money.
LLC (Limited Liability Company)
LLC is a fairly new form of business entity. It provides a lot more liability protection than a sole proprietorship. Each state handles LLCs differently, so check with your state about the details. The LLC allows for multiple owners, so it is a good option if there are business partners.
Some LLC advantages are:
- Even though the LLC has one owner, it allows for unlimited number of members.
- There is flexibility with your taxes. An LLC with one owner is taxed as a sole proprietorship. A multi-owned LLC is taxed as a partnership by default.
- Another big tax advantage of the LLC is that you can elect to be taxed as an S or C corporation. You just need to file a document with the IRS. It is best to ask a tax professional about this when you start a business.
- The LLC offers protection from personal liability.
- The managing member can deduct health care premiums.
- The members’ share of profit is not considered earned income and it is not subject to self-employment tax.
Some LLC disadvantages are:
- It is more expensive to set up than a sole proprietorship.
- Checks made out to an LLC cannot be cashed, they have to be deposited into a business bank account.
- The owners of the LLC must keep separate records. The LLC must have its own records. You have to keep meeting minutes. Money must be kept separate from your personal finances.
- The managing member’s share of profit is considered earned income and subject to self-employment tax.
- As a member of the LLC you are not allowed to receive wages.
Is an S corporation the right business entity for you? The S corporation is another popular business entity. An S corporation issues stock and is managed as a corporation with, officers, directors and shareholders. The shareholders (owners) have liability protection, their personal assets cannot be seized to satisfy business liabilities.
Some S corporation advantages:
- Creditors cannot pursue your personal assets such as your house or bank accounts.
- The S corporation does not pay federal taxes at the corporate level. Income and loss is passed through to shareholders who report it on their personal tax returns.
- Shareholders can draw salaries and receive dividends.
- An S corporation can be transferred (sold) without triggering adverse tax consequences.
Some S corporation disadvantages:
- Shareholders (owners) must be U.S. citizens or resident aliens.
- There are ongoing expenses to maintain an S corporation. Many states impose ongoing fees such as franchise tax fees.
- It is more expensive to set up than a sole proprietorship.
- The IRS scrutinizes S corporations.
An S corporation is great for the following types of businesses:
- Service businesses such as consultants.
- Businesses without significant start-up costs.
- Companies that don’t require major purchases before starting operations.
Depending on your business, you might also need a seller’s permit. If your business sells tangible property (physical items such as clothing, toys, furniture, and so on) to the public (wholesale or retail) you need to apply for a seller’s permit. It allows you to collect sales tax from customers. You will then pay that sales tax to the state. You can apply for a seller’s permit through your state’s Board of Equalization, Sales Tax Commission or Franchise Tax Board.
You might also need a business license, but it depends on what kind of business you are starting. You can check the SBA website to learn more about business licensing.
Marketing and Sales
You simply cannot succeed in business without a way to market and sell your products or services. The most important first step in marketing is to determine your target customer. Who is going to pay for your services? As you talk about your target customer you have to be specific.
Here are the reasons you must narrow down your target customer:
- When you want to sell to everyone you will sell to no one.
- If you don’t focus on a target customer, you can’t create an effective marketing strategy.
- Marketing is less expensive when focused on a target market.
- Your messaging will not resonate unless you focus on a specific market.
- It is easier to be the expert if you focus on a niche.
How to market your business?
There are many ways to market a business. When you start a business you have to look at the competition. You might have small or large competitors. They are established businesses. Your competitors have done many things that you are trying to do. If they are successful, they have figured out how to market and sell their services.
Learn about marketing from your competition the following ways:
- Find out how they pitch or talk to their prospects and customers.
- Where do they advertise? Do they run Facebook or Google ads? Are they doing any direct mail? Do they advertise on the radio or television? Are they doing any trade magazine advertising?
- Like and follow the competition on social media. How do they interact with people on social media? What do they post?
- You can sign up for Google Alerts and get notified when a competing brand is mentioned.
- Try their services or products. If you are unable to buy or try, talk to customers who have bought in the past.
- Monitor competitor websites.
- Sign up for their email lists.
- Enroll in their mailings and promotions.
What works for your competition might work for you. I don’t recommend that you copy the competition. The best marketing strategy is to improve on what your competition does. Learn from the competition and do it better.
Do I need a website?
If you are serious about starting a business, you must have a website. If you start a product business you will need a website to sell your products. If you start a service business, you need a website to build credibility. Many people will want to see your website before they do business with you.
Here is what all great websites have:
- A clean easy to use design – It is best to hire a professional web designer to help you with this.
- About page – This is the page that tells the story about your business. Why are you in business? What is your mission? What differentiates your business from the competition? Who are you? What is your background? Who are the team members?
- Social proof – Show testimonials. People trust your customers more than they trust you. So, share customer testimonials throughout your website.
- Outstanding website content. Most websites have bad content. It is poorly written basic information. A great example of outstanding content is this article. It is thousands of words. If you search for “How to start a small business” articles you will find that most of them are only a few hundred words of fluff. Great websites have great content.
- Show your contact information throughout your website. Show your phone number in the header area. Also show your physical address in the footer area.
- Display your address with map and directions on your “Contact” page.
- If you are a B2B business show the logos of your customers.
- Provide detailed answers to frequently asked questions.
42 Ways to Fund Your Small Business
When you start a business funding is always an important question. It is possible to start a business with little or no money. Many service businesses are inexpensive to start. But, there are businesses that require significant start-up costs such as restaurants.
Entrepreneurs start more than 6 million businesses each year. Unfortunately, only a fraction of them receive funding. The good news is that you can beat the odds by seeking out the various business funding options.
#1 – Fundable – $358 million has been committed on Fundable.
#2 – Kickstarter – Over 10 million people have backed a kickstarter project. Kickstarter is one of the best known crowdfunding options.
#3 – Indiegogo – 15 million people visit Indiegogo every month from 223 countries and territories. 47 percent of campaigns that exceeded their goals were started by women.
#4 – GoFundMe – Launched in 2010, GoFundMe is the world’s largest fundraising platform. Over $3 billion raised so far. They have a community of over 25 million donors.
#5 – Crowd Supply – They have a focus on hardware. The site claims that 100 percent of funded projects have been delivered to backers.
#6 – Crowd Funder – They claim to be the equity crowdfunding leader. They have a network of more than 130,000 entrepreneurs and investors. They have founded 100+ deals at an average deal size of $1.8 million.
#7 – Presales – This is a great option for software or product companies. When you pre-sell your product you are not only driving early business revenue you are also validating your business idea.
#8 – Contests – You can enter business contests where you get a chance to pitch your idea for a prize or an investment.
#9 – Friends and family – Sometimes they refer to this as the three Fs, friends, family and fools. Friends and family is one of the most common ways to fund a new business. If you are lucky enough to have friends and family members with money, this might be your best option to fund your business.
#10 – Using your savings – Another great option if you have money saved.
#11 – Credit cards – Using your personal credit to start a business is risky. The only time when I think using credit cards to fund your new business is a good ideas when it is done to fill orders. For example, if you receive an order that cannot be filled without using your credit cards, it is an acceptable risk. As soon as you get paid for the order you should repay your credit card debt.
#12 – 401K – You can use your retirement savings to start a business. I must tell you that I definitely don’t recommend this one. Starting a business is risky. You could lose every dollar that you have invested in your business.
#13 – Day job – A great way to fund a business is through your day job. Keep your day job while you are funding and building your new business. It is a slower start but safer because you don’t have to borrow money from anyone.
#14 – Inheritance – If you have an inheritance, you could spend it on anything, including a business.
#15 – Business line of credit – This is an excellent option if you have good credit. It might be difficult to get a business line of credit for a new business, but it is worth a try.
#16 – Factoring – Factoring is an alternative business finance method. Factoring enables you to sell your receivables at a discount to get cash upfront. This is an option if you have to fill orders long before you get paid.
#17 – Strategic partnership – You could join forces with another business to help with funding. If you are providing a service, you might be able to partner with one of your suppliers. Even if you don’t get cash, you might get your startup materials financed.
#18 – Co-founders – A co-founder can bring funding to the business. In addition, businesses started by more than one person are more likely to succeed.
Start-up Business Loans
#19 – Bank loans – A bank loan is an option, but it is a long shot if you are just starting a business. You might have a great relationship with your banker and make it happen.
#20 – SBA loans – The SBA offers a variety of loan programs. They offer general small business loans, microloans, real estate and equipment loans, and more.
#21 – Kiva – Kiva has helped 2.6 million borrowers in 86 countries. Kiva has provided over $1 billion in funding.
#22 – LendingClub – Founded in 2007. They offer small business loans.
#23 – Can Capital – Since 1998, Can Capital has provided over $6.5 billion in funding to more than 185,000 small businesses.
#24 – OnDeck – Since 2007, OnDeck has delivered $7 billion to small businesses world wide.
#25 – Kabbage – They have provided over $3 billion in funding to more than 100,000 businesses.
#26 – Paypal – Yes, that PayPal, also offers working capital for small businesses. PayPal working capital is based on your PayPal sales history.
#27 – Prosper – Prosper is a marketplace lending platform. 600,000 people have used their platform to borrow over $10 billion.
U.S. Government Funding
#28 – Rural Economic Development Loan & Grant Program – The Rural Economic Development Loan and Grant program provides zero interest funding for rural projects through local utility organizations.
#29 – National Institute of Health Funding – The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, also known as America’s Seed Fund, are one of the largest sources of early-stage capital for technology commercialization in the U.S. These programs allow US-owned and operated small businesses to engage in federal research and development that has a strong potential for commercialization.
#30 – Small Business Lending Fund – Established by the Small Business Jobs Act of 2010. The SBLF is a dedicated fund to provide capital to qualified community banks and loan funds.
#31 – National Association for the Self-Employed – NASE offers grants and scholarships to the self-employed.
#35 – The Funded – The Funded is an excellent resource for startups interested in venture capital. It is an online community of over 20,000 CEOs, founders, and entrepreneurs who discuss funding.
Alternative funding options
#38 – Razoo – Razoo was formed in 2006 to help underfunded nonprofits. Razoo is a great funding option for a cause.
#39 – Peerbackers – Peerbackers offers next generation capital solutions for businesses and investors.
#40 – EarlyShares – EarlyShares focuses on real estate crowdfunding. They connect accredited investors with commercial real estate investments.
Not in the U.S.?
#41 – The Canadian government – If you are starting a business in Canada, make sure to look into the Canada Small Business Financing Program.
#42 – The U.K. government – If you are in the UK, be sure to check out this resource for entrepreneurs.
Note: The information in this article is provided by the author. All content is general in nature, not legal advice and not warranted or guaranteed.