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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.
- Wanting to be one’s own boss.
Regardless of the motivation, 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.
Indeed, 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, as nearly half of new small businesses fail within that time frame.1 (TIkTok: Starting a business)
Two of the more 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.
Market: Have a business 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.
These are starting out steps to get your business up and running. Yet even in the early stages, it's wise to think about the future, such as having an eventual exit plan and, if you get partners, setting up a buy-sell agreement.
Means: Start-up funding options
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.
The most common source of funding a new business venture for many entrepreneurs comes from personal savings. In fact, just over half of all new businesses got started with $25,000 or less.
If you lack traditional collateral, you might even consider using life insurance as business loan collateral to secure the funding you need. (Related: Life insurance as business loan collateral)
Business credit: The six Cs
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:
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 typically 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.
Conclusion
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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Frequently Asked Questions about starting a business
Q. How much money do you need to start a business?
A. While costs vary by industry, you don't always need a fortune to get started. In fact, just over half of all new businesses are launched with $25,000 or less in initial capital.
Q. Why do most new businesses fail in the first five years?
A. Nearly half of small businesses fail within their first five years, often due to a lack of market demand or running out of funding. Creating a comprehensive business plan can help you avoid these common pitfalls.
Q. What are the six Cs of business credit?
A. When evaluating your loan application, lenders look at Character, Capacity, Capital, Collateral, Conditions, and Cash flow. Mastering these factors proves to lenders that you are a reliable borrower.
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Discover more from MassMutual …
Build a recurring revenue program for your business
Will the size of your market support your growth plans?
3 reasons an entrepreneur needs life and disability insurance
This article was originally published in June 2021. It has been updated.
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