“The journey of a thousand miles begins with one step”
The decision to start your own business can be daunting. You probably have a lot more questions than you do answers. You know that it will be worthwhile to be your own boss and build something of your own. However, the road seems so long and scary. You may have a family to support and don’t have the ability to invest all of your time or tens of thousands of dollars.
Of the many things to consider when looking to start a small business, in this article we’ll address:
- How to select a small business model
- Legally forming your business
- Financing your business
- Getting your first customers
What is a business model
A business model describes how a business operates and makes money. There are a number of common business models and an endless number of variations. Selecting one that fits with your budget and the industry you plan on pursuing is an important first step. To clarify this, we’ll explain a bit about how some large businesses that you are familiar with operate.
Netflix works on a subscription based business model. Members pay a fee based on how many screens they want to use the service on.
Another popular subscription business is Costco. Clearly the products they offer are different and Costco will still charge for every item purchased in addition to the membership fee. This is an example of how each business took the membership component and went their own direction with it.
Like most restaurants, Chipotle focuses on one category of food that they are good at. Unlike Netflix, Chipotle and other restaurants have a significant amount of overhead associated with their business model. This means that each month they need to pay for their rent, insurance, food costs, employees and equipment. These expenses can be prohibitive to business newcomers that don’t yet have the savings.
How to select a small business model
You may know what industry you want to get into by finding a cross section of your passion, talent and what is needed by the market. Understanding how to structure your business model to build a successful business without breaking the bank can be the more difficult task.
What capital is needed to start
If you have an idea of the industry that you are getting into and are able to project what your business looks like in 3-6 months, you should be able to make a list of what assets are needed to run the business successfully and figure out what the costs are.
It is important to understand that some business models won’t make a sale for several months or years. While most industries that you can start small businesses in will have some sales in the first few months, it is important to have some savings set aside in case it takes a few months for sales to come in.
The SBA has a lending program that is offered through most main street banks. This will be the best lending terms you can get from an institution. However, you’ll still need some of your own money to put into the business venture to show that you are committed and believe in your idea.
Is real estate and equipment necessary?
One of the expenses that commonly goes into small businesses is real estate and equipment. If you are just looking to build a blog to make a few thousand dollars on your free time, this may not be required. However, if you want to serve clients from an office or storefront, you’ll be paying rent. If you have equipment to run your business, this will be an added expense that you need to pay each month.
Staff and employees
While finding entry level talent may be easy, finding skilled employees, compensating them fairly, training them and keeping them as you grow your business will prove to be more difficult. If you already have extensive relationships with people in the industry that you are getting into, you may be a step ahead of the game. However, at some point you’ll still need to train your employees on how you want your business to work.
Marketing and getting your first clients
Getting your first few customers is simpler and more straightforward than getting customers for your niche manufacturing business. It is advised that you only get into a niche industry if you already have expertise and connections in that field.
It is important to understand who your primary consumer is and how to reach them. For businesses that sell to the end consumer such as a small construction business, you may find social media marketing on channels like Facebook and Instagram to be productive. Don’t make the novice mistake of underestimating what it costs to acquire your first customers.
Having a marketing plan that shares your unique value proposition and clearly articulates your value to your clients is something that you’ll want to be comfortable with before starting the business.
Forming a legal business entity
Establishing a corporation is the first step in starting a business. It isn’t difficult, however understanding what type of entity to form, how to do so and what the implications are can be tricky. Unfortunately, this paralyzes a lot of ‘would be’ entrepreneurs and they never get started.
It’s important for me to pause for a moment to say that I am not an accountant, lawyer or CPA. Everything that is shared here is my viewpoint and experience. If you are looking to start a business you can read up on what type of entity to form on legal blogs. Or, hire a lawyer to advise you on the topic.
S corporations and limited liability companies (LLCs) are the two most common types of legal entities that are formed. In most states, these entities have the same ability to shield you from personal liability. However, they differ when it comes to taxes and owners responsibility.
Owners of S corporations can get better tax treatment by taking a portion of their compensation as salary and a portion as distribution. Doing this will help them avoid self employment taxes on the portion they take as shareholder distributions.
Forming either an LLC or S corporation is easy, inexpensive and can be done from home with the help of online filing platforms like LegalZoom.
Financing your small business
Once you have a read on the industry that you are getting into and the business model that you’ll have to build, you should be able to estimate how much money your business will need to get off the ground and operate each month.
When looking to raise money to get your business off the ground, you can fund the business yourself from savings. Or, if you are looking to get outside investors, you have two main choices. You can either raise debt or equity.
Raising business debt
Debt is a loan. You will need to go to a bank or private lender to pitch them on your business and explain to them how you’ll secure their money with assets and how you’ll run the business in a way that you are able to pay them back their principal plus interest. Many of these loans offered through banks are given at favorable terms because they are backed by the SBA. However, you’ll need at least 10% cash to put in yourself and you’ll need to personally guarantee the remainder.
Raising business equity
The path to raising equity is not nearly as clear as the path in taking out bank debt. Typically equity for your small business will be raised through friends, family and colleagues who believe in the merits of your business.
Equity is ownership in the business. Unlike debt, the business does not have to make monthly payments to the equity owners. Instead, when the business makes a profit, it pays that money out proportionally to the equity owners of the company.
Raising equity has become a much easier process in the modern era of business. This is primarily due to the establishment of equity crowdfunding platforms such as crowdfunder. While it is less risky for you as the business owner to take on equity investors than it is debt investors, that is because you have a smaller piece of the upside.
Getting your first customers
Marketing strategies look different depending on the nature of the business that you are in. For many businesses that sell directly to the end consumer (B2C companies) you’ll want to have a large presence on social media and on search engines.
Building a social media following can be as simple as just doing the blocking and tackling. Share your images and posts, ask customers, friends and family to follow you and make sure you interact with them frequently. It won’t happen overnight, but with persistence, you should be able to carve out a nice audience.
To get more exposure on search engines, it is important to either hire a web developer or learn the basics of web design and SEO yourself. SEO stands for Search Engine Optimization. This basically means that you are presenting your businesses content in a way that search engines can understand it, see what services you offer and where you offer them. This too takes time, but is proven to be a successful marketing strategy for several small businesses.