Long dreamed of becoming your own boss? Now may be a good time to take the plunge. Today’s tech advances make everything from marketing to invoicing more manageable than ever. The Small Business Administration (SBA) and other entrepreneur-focused groups provide a plethora of free resources to support your growth. And with interest rates on loans ticking down, borrowing cash to fund your vision is getting cheaper.
Validate Your Concept
Make sure there’s a demand for your product or service. “Know the difference between an idea the market wants or needs and an idea that is a personal passion or a hobby,” says Kira Chereé Cobb, founder of Entrepreneur Business Basics, an organization that helps entrepreneurs launch and grow their businesses.Carolyn Katz, a mentor at SCORE, a nonprofit organization that provides free advice and resources for entrepreneurs, is a proponent of “customer discovery,” which means having open-ended conversations with potential customers. “Instead of asking, ‘Would you like red socks or blue socks?’ or ‘Would you pay $10 or $12?,’ you ask, ‘How do you feel about your socks?’” she says.
Online tools such as Google Forms and SurveyMonkey are helpful for getting feedback. However, Katz recommends in-person discussions when possible. If you’re thinking about opening a food truck, for instance, hang around existing food trucks and chat with customers there.
While you are investigating the viability of your concept, be sure to analyze competitors and track industry trends. One useful approach is a SWOT assessment, which helps you examine the strengths, weaknesses, opportunities, and threats (SWOT) related to your idea.
Review Your Personal Finances
Even with the best idea, it can take months to make money. “Businesses that are profitable out of the gate are the rare exception,” says Katz, who has a background in banking and venture capital.With that in mind, it’s critical to build a solid financial cushion —preferably enough to support you for a year—before you launch. At the same time, make sure your personal credit is strong, because you may need to borrow. “Whether it’s an Office Depot store card or a business Mastercard,” loan issuers will initially rely on an entrepreneur’s personal credit record when evaluating applications, says Cobb, who is also an affiliate representative with the Kauffman Foundation’s FastTrac entrepreneurship education program.
Also, review the benefits your employer provides to determine what you’ll need to replace. Start by examining your pay stub or Form W-2 to get a general understanding of your income. Then, add in employer-sponsored benefits such as health care contributions and insurance discounts that you’ll pay if you’re not eligible to join a parent or partner’s plan. In addition, while employers pay a portion of your payroll tax contributions for Social Security and Medicare, self-employed workers must pay the entire 15.3 percent tax. (However, you can deduct half of self-employment taxes on your tax return.)
Figure Out the Funding
There are numerous avenues to consider for financing your business, including self-funding (also known as bootstrapping), small-business loans or microloans, venture capital, grants, lines of credit, crowdfunding, hitting up family and friends, or a combination of these funding sources. The SBA has a range of loan programs, but it doesn’t lend directly. Instead, it works with institutions willing to extend credit to start-ups because the SBA guarantees a portion of the loan.The Chaga Company’s Escolar got a $3,000 loan from his mother to launch his business in San Francisco, and he agreed to pay interest if he didn’t reimburse her within six months. He was able to pay her back in full before that condition kicked in.
Entrepreneur Arnyce Foster-Hernandez, who recently opened Featuring, a café that sells coffee, tea, pastries, natural fruit juices and other items in the Harlem area of New York City, initially looked into securing a loan but says the process was time-consuming and disheartening. Instead, she self-funded, using $70,000 of her and her husband’s savings to open the café, and now relies on a business line of credit as needed.
A well-prepared business plan with detailed financial projections can strengthen your loan application. The SBA and SCORE have detailed templates that guide you through each step of creating a business plan. You can find the SBA template at www.sba.gov/business-guide/plan-your-business/write-your-business-plan; SCORE’s template is available at www.score.org/resource/template/business-plan-template-a-startup-business. You can also get personalized assistance from advisers at SBA district offices, Small Business Development Centers and SCORE.
To explore your loan options, you can use the SBA’s Lender Match tool at https://lending.sba.gov/lender-match, which connects businesses with nearly 1,000 SBA-approved lenders. Those not matched to lenders are connected to a network of free advisers who can help prepare them for future approval.
