An individual makes the choice to go into business for themselves typically for one or more of three reasons.
They can be:
- Motivated by a passion for their craft or trade.
- Yearning for a lifestyle change that provides independence and possibly more freedom than they may have working for a large organization.
- Driven by cash and for success.
In fact, according to the 2018 MassMutual Business Owner Perspectives Study, more than half of today’s entrepreneurs said they started their business for that lifestyle change or to be their own boss. But once an individual starts that business, they soon realize there are a lot of important decisions that have to be made — decisions that affect their business, family, employees, and the financial futures of everyone involved.
Forty percent of adults say its easy to start a business.1 It may be easy to start a business, but it’s difficult to make it a success. The first five years in the life of a small business are a make or break time for the owner.
The two most common reasons new businesses fail in those early years are due to there being no market demand for the product or service offered and the owner running out of funding.2
Market: Have a plan
It all starts with having a sound business plan. A key component of that business plan is knowing your market, your competition, and your customers. Here are some tips to help you understand if there is a market for your new business venture:
- Define the market need. A good business idea fills a need that exists in the market or improves on an idea that already exists. Focus on features and benefits, the competitive advantage you have, and what makes your product or service unique.
- Know your industry. You’ll want to know how fast a business in the industry can expect to grow, what kind of profit you can expect to make, and what the average margins are in the industry. Also, identify trends. Ideally, you want to choose an industry that’s either at an early stage in its life cycle or in the reinvention stage. Choosing an industry in the mature or declining stages makes it harder to compete.
- Identify your target market. Who will your business serve? You can’t be all things to all people. To create a successful business, you need to narrow your market focus. Design your ideal consumer in terms of demographics, geography, buying habits, income, lifestyle, and channel position (B2B, B2C).
- Research your competition. Just as important as understanding your target market is understanding your competition. You need to know what your competitors are up to so you can better position your products and services.
- Properly price your product or service. A smart pricing strategy starts with understanding the market price, which is the average charged by all your competitors and the price at which their product or service is generally valued in the marketplace. Ensure that you are providing value commensurate with your price and consider ways to create recurring revenue through subscription-based pricing models.
Means: Getting the funds
When it comes to starting a business, cash is king. Before starting your business, you need to determine how much money you need to get your business up and running, what the funds will be used for, and all your expected sources of capital.
Be as detailed as you can in estimating startup costs. Include fixed operating expenses, which are the administrative expenses necessary to run the business and often include costs such as insurance, rent, utilities, advertising, taxes, and licenses. You’ll also need enough working capital to get you through the period before your business begins making a profit (typically 6 to 18 months). Last, but not least, be sure that you add in some extra capital for contingencies. To prepare your startup for success, you need to ensure that your available capital and funding exceed your startup costs.
According to a 2018 survey done by OnePoll in conjunction with Lendio the most common source of funding a new business venture came from personal savings. In fact, just over half of all new businesses got started with $25,000 or less. Still, many business owners do need financing from lending institutions to get their businesses off the ground. And to get the funding you may need it’s important to remember the six C’s of credit:
- Character. What is your personal credit/borrowing history?
- Capacity. How soon can you show a profit and repay?
- Capital. How much have you personally invested?
- Collateral. What other assets can you pledge as backup?
- Conditions. What loan terms are you looking for, including purpose of the loan?
- Cash flow. Where will the money to repay the debt come from?
When reviewing your loan application, lenders look for good credit, a feasible business plan, adequate owner equity, and sufficient collateral. Perhaps most important, they look for management expertise and commitment — what real work experience do you and your partners have in managing your type of business. As a rule of thumb, these six C’s will help you determine if you are a good candidate for a loan.
Keep in mind: Lenders won’t finance 100 percent of your business. They want owners to contribute at least 25 percent of the capital and want to see cash flow equal to 1.3 times the debt. Also, start with your smaller, local banks when looking to obtain loans. They typically have a higher application approval rate than the big banks.
Starting a business can be a rewarding endeavor. It gives you the opportunity to create jobs in your community, deliver a valuable product or service to those who need it, and potentially provide a lifestyle and income to you and your family. Just remember that when you embark on this journey you have the market, the means, and the mindset to make it a success.
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1 Babson College, “Global Entrepreneurship Model,” 2020.
2 CB Insights, “Analysis of 101 Startup Postmortems,” 2019.