Starting a small business is considered by many to be the American dream. But for many people this dream ends rather quickly and they are left owing large debts. Statistics vary, but the Small Business Administration estimates that as many as 4 out of 5 businesses fail during the first five years. Here are a few questions to consider to help keep your dream from turning into a nightmare.
Do you know the business?
The first thing you need to know is how to produce the product or provide the service. If you don’t, it is advisable to find a job in the industry for at least a year. While you are there, try and learn as much as you can. You may find out that the industry is not for you after all.
Do you have a good idea?
You don’t necessarily need a new idea, but you don’t want to put a product or service on the market if the market is already full of similar products or services. It is hard enough to get started without attempting to compete with existing businesses which already have loyal customers.
Can you raise money?
The first step in raising the required capital is to get a realistic estimate of the amount of money you will need to start up your business. Getting a realistic estimate should be done very early in the process. Try to keep in mind all future expenses such as rent, supplies, inventory, equipment, wages, and advertising.
To ease your financial burden, you may want to find investors for your business. Generally, a knowledgeable investor will not put his or her money into a new business unless you have made a sizable financial commitment yourself. An experienced investor knows that you will be more motivated to make your business work if you have a considerable amount of your own money in the business. Most such investors will look for you to put up at least 50% of the start-up costs.
There are two basic types of investors, those who are looking for equity and those who are simply looking to collect interest on a loan. Commercial banks will lend money without seeking an equity interest, but will usually ask for some kind of collateral. When giving an equity interest, you are giving up partial ownership, so it is important to consider your options when looking for an investor. Consider whether you would rather share ownership or be required to make loan payments.
Report 3 January 1996
If you are having trouble getting a bank loan, try the Small Business Administration. The Small Business Administration (SBA) is a government agency that provides advice and other services to prospective businesspeople. It may provide loans, but you must meet certain requirements. For most prospective borrowers, the SBA will provide loan guarantees. To be eligible for such a loan guarantee, you must first seek financing from a bank or other financial institution. If you are rejected for the loan, then you are eligible for a loan guarantee for up to 90% of the loan from the SBA. You then can reapply for private financing with the guarantee.
What kind of structure should I use?
There are three basic structures that you can use for your business, and each has its advantages and disadvantages. As a prospective business person, you should consider which is best for your company’s needs.
1) Sole Proprietorship
A sole proprietorship is the ownership of all of the assets of the company by an individual. This type of business structure presents the least complications for a new business person. However, if you are a sole proprietor and you decide to use a fictitious name, you must register it with the county clerk’s office.
A partnership is the association of two or more people. It may be established by a written or oral agreement. There is a sharing of the profits and losses of the business by the partners.
When starting a partnership, it is best to have a written partnership agreement. This agreement should spell out how the business will be run and how the profits and losses will be split. It is advisable to get legal help for this, but it is not necessary. Another consideration when starting a partnership is taxes. Each partner is taxed individually. The partnership must fill out a tax return, but it is merely informational.
A corporation is an artificial legal person. Generally, a corporation is more complicated than a partnership or a sole proprietorship and more expensive to establish. There are more legal requirements, and seeking legal help is probably necessary.
How should you plan?
Generally, it is a good idea to have two basic written plans for your new company. One is a business plan which defines how you will run your firm. The other should be a financial plan which outlines some of the aspects of your company’s budget.
A business plan should begin with a cover sheet which lists the name of the business, the address and phone number, the names of the owners of the business, and the primary goals of the business. When considering the rest of the business plan, keep in mind why you are writing it. Your business plan can be a useful tool in attracting investors. If that is the case, you would probably want to write a detailed report, and it could be advisable to seek professional help. However, if the business plan is for yourself, its presentation can be more informal. In any case, your plan should include the following:
The financial plan also has several key elements:
How should you be insured?
All businesses need some type of insurance, but insurance needs will differ from company to company. In New York State, if a small business has any employees, it must then carry workers’ compensation and disability insurance. If the business owns vehicles, it must have automobile insurance. Landlords often require a business owner to have liability insurance. Bankers and investors may want a company to have fire and other types of insurance. In some cases, partners in a firm will want the other partners to have life insurance. This will be especially important if the business relies on each partner’s unique skills.
What about licensing?
Currently, most businesses must be registered in some way and many will need one or more licenses from regulatory agencies. All partnerships and those sole proprietorships that choose to do business under an assumed name must register with the country clerk’s office in the county where the principal place of business is located. All corporations must register with the New York Department of State.
Since so many businesses are required to be licensed, it is best to contact some licensing agencies directly to find out if your company needs a license:
For New York State, contact:
New York State Department of State, Division of Licensing Services
New York, NY 10007
For New York City, contact:
New York City Department of Consumer Affairs, Division of Licenses
New York, NY 10004
Outside of New York City you should contact your county clerk’s office.
For Additional Information and Resources
Service Corps of Retired Executives
United States Small Business Administration
26 Federal Plaza, Room 3100
New York, NY 10278
Small Business Development Center
1 Pace Plaza
New York, NY 10038
Small Business Development Center
94-20 Guy R. Brewer Boulevard
Jamaica, NY 11451
Small Business Institute
School of Business
Riverdale, NY 10471