Starting your own business can be a daunting prospect for many. Here are a few tips to help aspiring entrepreneurs get started on the right track.
“So, you want to start your own business…”
That’s the dream of many of us. After working at a job or for a company which did not suit their personality or aspirations, almost everyone, whether retired or working, has felt the urge to be out there on their own. Desires for independence, setting your own work hours, achieving a desired work-life balance, and finding work we enjoy doing all these thoughts.
However, getting started can be a daunting prospect for many. Not knowing what steps to take, fears of unknown costs, and not knowing how much money you will need to finance your enterprise often stops people from proceeding further. Many small businesses fail because they did not have a realistic plan to get started or turn a profit. Many also underestimate how much capital or financing they will need to turn a profit. Sometimes a great business can be doomed to failure because you picked the wrong partner.
Today, and in a forthcoming series of articles, I hope to provide you with the benefit of my experience as to what circumstances and initial actions typically make one business successful and those which doom another business to failure.
Mandatory disclaimer: I am not your lawyer. What I tell you below is not legal advice. The advice and suggestions I am giving are for general information only and cannot possibly cover every situation or circumstance. If you need advice tailored to your specific needs, you should contact an attorney or certified public accountant. Now that we are all on the same page, let’s get started.
Every long-term, successful business I have seen has had a written business plan. If your goal is to open a hot-dog stand or start a very simple consulting business (and don’t need money from anyone else to do so), then you may not require such a plan and can still have a profitable business. However, the exercise of crafting such a plan can force you to focus on how you will become successful. If you cannot explain in writing how you intend to achieve success, then the odds are the business will ultimately not be successful once it gets going.
The essential purpose of a business plan is to explain what goods or services you intend to sell or provide, why there is a need or demand in the relevant market for your goods or services, and how your business will generate revenue. Some plans are simple, perhaps consisting of 2-3 pages. Some banks need only something short and sweet if you come to them seeking financing. Other plans have to be much more detailed, especially if you are seeking individuals to invest money in exchange for ownership in the business, or you want financing from a lender in the six to seven-figure range.
Depending on your talents, experience, and the simplicity of your proposed business, you may be able to do a simple plan yourself. While some plans are available for sale on the internet, an in-depth search via Google, Bing or any other search engine will often turn up a free template which you can easily massage to get your plans together. On the other hand, if your business will need lots of money from investors and/or lenders, or is a business which most people will not intuitively understand (eg opening a dress shop vs. starting an oil-field services company), then you will likely need help crafting a detailed plan from attorneys, accountants and/or consultants who have experience in the relevant field.
“Show me the Money!”
Every successful business has enough capital (eg, money, dough, scratch, bucks, Benjamins) to open the doors, and pay the bills until it begins to turn a regular profit. A business without enough capital is like you don’t get enough oxygen: you are not going to live long. Few are the enterprises which got started and immediately turned a profit. Depending on whom your customers are (eg general public vs. other, larger businesses), you may not generate revenue for months, all the while the expenses continue to be incurred, including paying back the debt you may have incurred to get the business going . Also, you may need to allocate some money to pay your own personal expenses, until the business’s revenue begins to exceed its expenses (Congrats! You now have profits!)
Where do you get this capital? Well, if you personally have all the money needed to adequately finance your business, then welcome to an exclusive club whose membership is very small. You will avoid the headaches of dealing with business partners questioning your decisions, investors demanding to know when they will begin to receive a distribution, low cash flow when clients or customers are slow-paying, and making payroll. If you are a member of this elite club, let me know. I will give you my super-secret, second cell number to call me anytime day or night.
For everyone not in the club, they will need capital from others to get the business up and running. The two main sources are investors and lenders. Investors are often your family members and close friends who are willing to put money into the business in exchange for taking a percentage of ownership or future profits. Perhaps a parent wants to help a deserving, talented adult child open a dance studio. Close friends may want to invest in your new construction company after being a project manager for years. In short, investors provide you with the money, while you provide the sweat. As you can imagine, the terms under which these investments are made, and are expected to be returned, are all over the board.
Finally there are lenders. Banks, financing companies and sometimes even individuals will provide you with cash, or a line of credit, in exchange for a promise to be repaid in the future with interest. Often these loans have to be secured by some business assets (eg equipment, your receivables, sometimes even your house). Almost always the lender will demand that you personally guarantee the loan or credit from them to you. They know your business might fold like a house of cards; they expect you won’t. You may be able to get your initial capital from the Small Business Administration or similar state government agencies. Sometimes those loans provide better terms than banks or private lenders can. So, try that first.
Again, I hope what I have written will get your mind working as to the basics of getting your chosen business going. Next time, I will explain one way to form your business, and the basic steps you need to make it (borrowing from “Oh Brother, Where Art Thou”)”bona-fide.”