1: Come Up With a Business Idea
There you were, on a midsummer’s stroll with your dog, when your fur baby’s back began to hunch and tail started to extend. Your stomach dropped because you knew you didn’t bring any doggy bags with you, and your neighbors definitely saw it happen.
As you scanned the area for something ― anything — to help you take care of your pup’s business, the idea for a business of a different nature occurred to you: Wouldn’t it be great if there were biodegradable pet bag dispensers with stakes that could be placed in the grass throughout the neighborhood? They would be cheap, pet friendly and environmentally friendly. How perfect!
A half-baked idea is about as far as most people get. You may have even forgotten about it by the time you finished your walk.
To ensure that you actually remember your idea, keep it in a log with other top ideas. (Having a list to come back to will help you when moving into the latter stages of research.)
Kathyrn Gratton advises going a step further: Tack up your ideas on the bathroom mirror so you have to see it every day.
Gratton is the president of the Hagerstown, Maryland, Score chapter. Score provides free mentoring to small businesses and entrepreneurs nationwide.
“The act of writing it down makes it more real,” she says.
As you continue to flesh out your idea, consider your own expertise in the area. Do you have any insider experience, knowledge or connections? Are you passionate about this topic or field? Is your idea feasible? Who would buy this product or service?
And while you might think you’re sitting on a great invention, you need second opinions. It’s crucial to get feedback from others to refine your idea.
Gratton recommends asking that one brutally honest friend we all have. You know, the one that’s comfortable with telling you if you’ve gotten fat over the holidays.
“They are the best to run things by because you know they will tell you the truth,” she says.
2: Research the Marketplace
Once you have decided to move forward with your most promising idea, you’ll need to conduct thorough market research to turn it into a promising business model. The more comprehensive the research, the better, as this stage will inform what to include in your business plan.
Now is when you answer those initial questions of feasibility.
One method that can guide your research is called the SWOT analysis. It’s an approach that will define your business idea’s strengths, weaknesses, opportunities and threats.
As you dig into the research, you’ll find that your idea probably isn’t novel at all. Don’t scrap your plans just because someone else has a similar business. You’ve found a threat, aka competition. Don’t be intimidated; their business will help you get a better idea of your own.
Besides looking at other businesses, you will want to suss out your target market, customer demographics, price points, suppliers and more.
Here are some great, free tools to help with your market research:
- Government data: The U.S. Census, Bureau of Labor Statistics, Federal Reserve and the Bureau of Economic Analysis report on trends of U.S. consumers such as credit, demographics, income, location, spending and much more.
- Alibaba: A Chinese-based e-commerce and retail sales company, Alibaba is a powerful tool to connect with international suppliers and manufacturers.
- SizeUp: Providing comprehensive business analytics, SizeUp allows users to find customers and suppliers, compare industry competition and advertise more efficiently.
Schuyler Richardson used Alibaba when conducting market research for his e-commerce store on Amazon. He found an international supplier on the site, which helped him iron out shipping costs and price points.
“I’ve found suppliers are willing to negotiate, even on your first order,” Richardson writes in his guide to Amazon private label business. “While they may claim their [minimum order quantity] is 500 or 1,000 units, it’s entirely possible to talk them down to, say, 250 or 300 units.”
3: Create a Business Plan
Some entrepreneurs excuse business plans as a wasted paper. They say that financial projections are wishful thinking and that business plans aren’t needed in this day and age.
If you look, yes, several successful businesses jumped in headfirst without a formal business plan. They got lucky. If you want your business to be successful, it’s always good praxis to plan ahead.
As a 2016 study published in the Strategic Entrepreneurship Journal found, it indeed pays to plan.
Entrepreneurs who wrote formal business plans were 16% more likely to “achieve new venture viability” (aka succeed) than those who didn’t.
Dr. William Sahlman, author and professor at Harvard Business School, is one such proponent of writing business plans, but he may agree with detractors on one point — that financial projections include a lot of wishful thinking.
In his book “How to Write a Great Business Plan,” Sahlman lays out the purpose of a business plan and exactly what to include in it.
“You would think that the only things standing between a would-be entrepreneur and spectacular success are glossy five-color charts, a bundle of meticulous-looking spreadsheets, and a decade of month-by-month financial projections,” he writes. “Nothing could be further from the truth.”
Instead of focusing on years of sales and financial projections, Sahlman recommends writing a business plan that connects with potential investors and shows your personality. That said, you will need to include some numbers.
It’s important to have a good idea of your startup costs, which could include how much business insurance will cost (especially if you plan on running a business that could be considered dangerous for workers or customers), how long until you’re profitable and how financial projections could affect your business’s future.
But don’t make numbers the focus. Paint a bigger picture.
According to Sahlman, these four key areas are important to any startup and must be covered in a business plan:
- The People: Who’s running the show? Include yourself, other cofounders and all managerial positions. Be sure to show your personality as well as expertise and skill set.
- The Opportunity: Here’s where you explain your product or service and who will buy it. Highlight price points, customer demographics and competitors.
- The Context: This section should cover basically all “factors that inevitably change but cannot be controlled by the entrepreneur,” writes Sahlman. Such factors include laws, regulations and economic trends that could impact your business.
- The Risk and Reward: This is where, as responsibly as possible, you should use numbers to predict the future. Entrepreneurship is not all rose-colored monocles and top hats. Describe the worst-case scenario and how you plan to weather the storm.
The above guidelines should give you parameters to create a fluid document. Business plans need to appeal to several different people, including potential business partners, bank lenders, angel investors (people or firms who fund businesses in the startup phase) and most of all yourself.
4: Choose a Location
The largest considerations when choosing a location for your new business is the local government and economy.
“Each state has their own business climate,” Gratton says. By climate, she means income taxes, tax credits, minimum wages and fees — even regulations between municipalities differ.
You want a location that is friendly to your type of business, which can vary by industry. For example, some cities want to attract tech startups and will offer only those types of businesses tax credits and other incentives for choosing their city.
An analysis by The Penny Hoarder found the top 10 cities for startups, which include some midsize cities among the results:
- Lexington, Kentucky
- Boise, Idaho
- Salt Lake City, Utah
And several larger cities like Miami, Austin and Kansas City, Missouri.
What they all have in common — and factors you should consider when starting a business — are an affordable cost of living, high earnings for self-employed workers, low unemployment rates and more.
As you juggle all these different aspects, don’t forget to factor yourself into the equation. Ask yourself: Is this an area where I see myself flourishing, both personally and professionally?
5: Join a Community and Know Your Resources
Now that you’ve chosen a location for you business (either by a complex algorithm of all important factors, or by darting a map) you need to root yourself in the community and know where to turn for resources when the time comes.
According to a study from America’s Small Business Development Center (SBDC), “more than 13 million Millennials believe the biggest barrier [to starting a business] is not knowing where to go for help.”
The same survey also found that 41% of Americans would quit their jobs to launch their own business if they had the proper resources.
Well, 41% of Americans, here they are. Each resource below has a local chapter in your area.
American Advertising Federation
The American Advertising Federation (AAF) is over a century old. As a nonprofit membership organization with more than 200 chapters nationwide, AAF offers benefits such as continuous education, networking events, workshops, discounts and access to consumer data from industry reports. It also has a dedicated club for young advertising professionals, 32 and under, called Ad 2.
Chambers of Commerce
It may come as a surprise that the U.S. Chamber of Commerce is not a government agency. Instead, it’s the largest business lobbying association in the country and, according to its website, the world. There are more than 13,000 Chambers nationwide. Chances are there’s one in your area. Memberships come with perks like networking events, industry reports and statistics as well as access to the Chamber’s publication, Free Enterprise. Memberships start at $300.
Since its founding in 1964, Score has become a crucial resource for small business owners. The nonprofit has local chapters in every state — more than 320 total. Each chapter hosts its own events, workshops, conferences and mentoring programs while the national website offers tons of free or low-cost webinars and e-courses. Score’s business mentors are volunteer experts who are available in person and online to provide invaluable, free advice to entrepreneurs.
Small Business Administration
The Small Business Administration (SBA) is a government agency that was created through legislation in 1953. Its sole purpose is to assist small businesses in the U.S., and it does that through special small-business loans, free counseling, e-courses, open data and several other services. The SBA also partners with Score and the Small Business Development Center to ensure that access to guidance and mentoring is available in almost every region of the country.
Small Business Development Center
There are more than 1,000 Small Business Development Centers (SBDCs) in the U.S. The SBDC partners with universities, government agencies and private firms to provide entrepreneurs with free business consulting and e-courses. Local centers run low-cost workshops and networking events, and the national center publishes studies on entrepreneurship and hosts trade shows and annual conferences.
6: Secure Startup Funding
Funding your business requires a slightly different approach for each monetary source. Some entrepreneurs recruit their friends and family, while others turn to investors or fund the venture themselves.
If you’re relying on lenders, a well-made business plan really pays off because it shows them that you’ve done your homework. In the startup phase, lenders are crucial to your business’s success because chances are you don’t have tens of thousands of dollars lying around to fund it yourself.
How to Start a Business With No Money
If raiding your trust fund or 401(k) coffers is out of the question, you still have plenty of options to cover upfront business expenses.
Unfortunately, you can’t just walk up to the bank with a business idea and walk out with a loan.
“It’s not that simple,” Gratton says. “Banks want to see that they’re going to get their money back.”
And since the 2008 recession, it has become nearly impossible to get a bank loan to fund startup businesses. Usually, banks want to see proof of reliable revenue before approving a business loan. Since your business is presumed to be in its infancy, you may not have that proof yet.
However, you can take out a personal loan from the bank and put those funds toward startup costs. The amount of these loans are much less than business loans, usually $50,000 or less. To qualify, banks will inquire about your credit history, outstanding debt (credit cards, student loans etc.) and anything that could be used as collateral, such as your house or car.
If you do have proof of business cash flow, a business loan and a line of credit from a bank are fair game.
Each lender may want to see something different in your business plan. If you’re unsure what info you’ll need to include, just ask.
“What is it, Mr. Banker, you want to see in this business plan?” Hal Shelton recommends asking. “Let them describe it for you.”
Other than loans, consider these common funding sources to cover business costs:
- Crowdfunding: If your business or background story appeals to the masses, consider crowdfunding. Websites such as GoFundMe, Indiegogo, Kickstarter and Patreon allow you to directly ask everyday people for financial help with launching your business.
- Angel Investors: These investors are people or firms who specialize in helping startups with funds and advice, usually for businesses that make tangible goods, not services. A useful tool to find and sort through local investors is The Angel Capital Association.
- Grants: Grants are basically free money for meeting certain criteria that could be either personal or industry-related. For example, follow The Penny Hoarder’s guide to apply to grants for businesswomen. You can also search for a host of other options at Grants.gov.
7: Choose Your Business’s Legal Structure
Each business structure is a little different when it comes to accounting, financial reporting and tax filing.
With plenty of legal structures to choose from, there are two uniquely important factors to consider: “Which one protects me the best” and “which one is going to save me the most money,” Gratton says.
The best choices for personal and legal protection include corporations (B, C and S Corps) and Limited Liability Companies (LLCs). These structures protect the owners’ personal assets (like cars and houses) from debt accrued by the business, but the structure tends to be much more complicated and costly in business taxes.
Lower-tax options include nonprofit corporations, cooperatives, partnerships and sole proprietorships. The only business structure completely exempt from state and federal taxes is a nonprofit.
But businesses that are organized as sole proprietorships or partnerships don’t necessary pay taxes themselves. All business earnings are reported to the IRS, but taxes are passed on through the owner or partner’s personal income tax. So the business itself isn’t paying taxes per se.
Each business situation is unique, and the categories above are generalized. Certain legal structures have specific eligibility requirements and stipulations. Your business may not qualify for each one. If you’re unsure, it’s best not to guess. Ask an accountant or contact your local SBDC office before filing.
8: Pick a Memorable Name
There’s actually a lot that goes into making a good business name.
In the American business world, portmanteaus are rampant. This is when two separate words or ideas are smashed into one. Ameribank, is one example. While they’re rampant, that doesn’t necessarily mean they’re good options.
“You want to blend what type of perception and what type of culture you’re going to have,” Gratton says.
If you’re planning to open a family-friendly ice cream shop, avoid stuffy names like Frozen Foods Incorporated. You won’t want to use names that are too derivative like Blended Dreams Unlimited, either.
In this case, you would want to be fun but also informative, so that when people read your name, they know what you do or sell.
Gratton, again, recommends recruiting your brutally honest friend and asking: “If I told you this business name, what does it make you think of?”
9: Make Your Website and Social Media
According to estimates from Statista, about eight of every 10 Americans use social media, and as a business, it’s crucial to have a profile easily accessible to those users.
Once you’ve established your business name, try to get that same name as a social media handle (aka searchable username) on Instagram, Twitter, Facebook and LinkedIn. Having the same handle across all of your social media platforms makes it easier to connect with customers.
Domain names, which are names for your website address, are just as important. These, however, will cost you some money. It’s possible to nab a domain name for as little as $2.99 for the first year, if your name is available. If the name is taken, it will cost you extra to buy it from the owner.
For most businesses, use a .com domain name. The exception is if you’re a foundation or nonprofit. In those cases, .org is appropriate.
Use these popular websites to search for and buy domains: Domain.com, GoDaddy.com, Namecheap.com and Register.com.
Once your social media accounts and websites are set up, start posting content to connect with your community and customers. In The Penny Hoarder’s guide to social media best practices for small businesses, we recommend using the 80/20 rule, where 80% of your posts provide value to your followers and only 20% of your posts are promotional.
10: Register With the Government
You’ve done your homework. You’ve studied the market, crafted a killer business plan, found the right lenders and started spreading the word that you mean business.
It’s time to make it official.
What that means, unfortunately, is paperwork. Tons of it.
After you’ve landed on your name and filed for the appropriate business structure, you will then need to register as a business entity with your state government. Depending on your state, it could be as simple as sending a form to your Secretary of State’s office. At this point, it’s a good idea to file any related trademarks or patents for your business name and products, too.
Certain industries may be required to apply for permits and business licenses, including those dealing with food, wildlife, alcohol, firearms, agriculture, transportation, energy and media.
All businesses that plan to pay employees or have already registered as a corporation or partnership must get a federal tax ID aka Employer Identification Number from the IRS.
FROM THE MAKE MONEY FORUM
If your state requires income or employment taxes, your business will also need a separate state tax ID.
Local and state regulations differ, so it’s important to check your local government’s website for more information.
Don’t go it alone. All this paperwork is a herculean task for one entrepreneur. Hire an accountant and utilize the free or low-cost local resources mentioned above (SBA, SBDC and local Score mentors).
“While in the beginning you’re trying to pinch pennies,” Gratton says, “you just have to think how painful it will be to pay a big fine or lawsuit later because you didn’t file the right paperwork.
“The more you’re reaching out to professionals to help you through it,” she says, “the better you’re setting yourself up for success.”