Thinking Of Starting Your Own Business? Do This First
Dan Rafter6-minute read
UPDATED: April 12, 2022
Have you dreamed of opening your own small business? Do you fantasize about working for yourself? You're not alone. The U.S. Small Business Administration, in its 2018 Small Business Profile report, said that there were 30.2 million small businesses operating in the United States.
Thinking of opening a business of your own and joining this crowd? Here’s some advice.
Getting Ready For The Stress
You have plenty of things to do when starting a business. The first step, though, might be to prepare yourself emotionally. Dane Kolbaba, founder of Phoenix-based small business Watchdog Pest Control, said that starting and running a small business can take an emotional toll on entrepreneurs.
There might be weeks when business dries up and you can't seem to nab a single new customer. You might get hit with negative reviews on Yelp or TripAdvisor. You might suffer through what seems like an unending string of late nights trying to fine-tune a product or service. A new competitor might open in your market, siphoning away your most valuable customers.
And that doesn't even factor in the stress of worrying about rent, insurance payments, rising credit card bills and hiring the right staffers.
If you're not prepared for this stress, opening a new business might not be the right choice, Kolbaba says.
"I wouldn't even attempt the entrepreneurial journey if you aren't emotionally prepared to handle the stress," Kolbaba says. "Just know that it is going to be taxing at times when you run your own business. It's going to have the highest of highs when you have a good sale and the lowest of lows when you get your first negative review. I liken it to a roller coaster of emotions."
Stacy Tuschi, owner of The Academy of Performing Arts in Oak Creek and Franklin, Wisconsin, understands the challenges of starting a small business. She also knows what it's like to succeed: The U.S. Small Business Administration named Tuschi the 2019 Wisconsin Small Business Person of the Year.
Tuschi's advice for entrepreneurs preparing to start their own small businesses? If you need financing from lenders – and many small businesses do -- write a compelling business plan, one that clearly outlines how you will grow your business and how you will generate profit.
That might sound intimidating. But Tuschi says crafting a business plan that will make your company attractive to lenders doesn't have to be a challenge.
"This doesn't have to be as sophisticated as you think," Tuschi says. "They just want to see the math."
Lenders want to see what revenue your business has already earned, what expenses you pay each year, and get an idea of your plans for the business. Be careful with this last part. Tuschi says that you can't just predict that your revenue will double next year. You must provide reasons for why you think your business will grow.
And if you can show examples of past success with your business, lenders will be far more willing to loan you money.
"Make sure to save past projections, because they can come in handy in the future," Tuschi says. "When you show you hit your numbers or even exceed them, lenders will be more inclined to believe you can do it again."
You’ll have plenty of choices for loans. You can apply for a loan from the U.S. Small Business Administration or from private lenders. You can even apply for a personal loan to help fund your business, including one from from Rocket Loans®.
Apply Today for a Personal Loan from Rocket Loans
Getting Ready Financially
DeAnna McIntosh, chief global strategist with retail consultancy The Affinity Group International, which has offices in Miami and Atlanta, recommends that entrepreneurs eliminate all their personal debt before opening their new company. They should also work on boosting their three-digit credit score, she says.
Both of these steps are essential to businesses that will need funding from outside investors, McIntosh says. Lenders will be more willing to loan dollars to business owners who have a high FICO® Score – lenders consider scores of 740 or higher to be particularly strong – and low amounts of debt, she says.
"Make it a priority to pay off your personal debt and work on any negative impacts to your credit report to give yourself the best chance at receiving funding," McIntosh says. "You will already have the pressure of the business financials in your hands. You don't need your personal financials weighing you down."
Making sure that your business can attract investment dollars is a positive. But you also need to boost your personal finances before starting a business, Tuschi says. Starting a business comes with risk. You want to eliminate, then, any personal debts you have and build an emergency fund of cash that you can tap in case of financial emergencies.
For instance, what if the hot water heater in your home goes on the fritz? You want enough money so you can pay for its replacement in cash. That way, you won't have to resort to putting the expense on a credit card. Having this kind of safety net is always important, but it's especially so when you are trying to absorb the costs of running a small business.
Tuschi recommends that this personal emergency fund contain at least 6 months of estimated personal expenses. You want to make sure that you have enough money, for example, to pay your home mortgage on time, even if your business doesn't generate the revenue you expect.
"Cash is king," Tuschi says. "If something goes wrong in the business and you need to cut expenses, your paycheck might be the first to go."
Tuschi recommends that in addition to building a personal emergency fund, entrepreneurs build a second emergency fund, this one in your business savings account. This account should contain enough money to cover at least 3 months’ worth of business expenses, she says.
"Having this emergency fund will make sure you aren't making irrational decisions when something goes wrong," Tuschi says.
Don’t Quit Your Day Job – Yet
McIntosh recommends entrepreneurs continue working their full-time jobs for as long as they can. This will help them raise more money that they can use to cover personal expenses while they wait for their businesses to grow. They can also use the money they earn from full-time employment to pump more funds into their growing small businesses, McIntosh says.
"Every day I see messages of 'quit your 9-to-5 and start your business.' But what the people behind these messages aren't saying is that you need money to make money," McIntosh says.
Lenders look at your last 2 years of tax returns, credit reports and bank account statements when deciding whether to loan you money for your business, McIntosh says.
"If you quit your job and don't have steady income coming in or a substantial investment that you saved up, you have drastically reduced your chances at securing funding," McIntosh says.
Give It A Try Before You Go Full-Time
Brandon Anderson, civil engineer and project manager with Saratoga Springs, Utah-based Anderson Engineering Co., has been involved in the start-up and expansion of several small businesses during his career. His top recommendation? Test out your product or service before you go into business for yourself.
"Moonlight first," he says. "This allows you to test your idea, identify the weaknesses and strengths and ensure your business or product is actually viable."
This will reduce the odds that you'll start a small business selling a service or product no one wants. If you can't generate interest in an idea while working it as a side hustle, the odds aren't great that you'll succeed even by devoting yourself to this product or service full time.
Anderson recommends, too, that all aspiring entrepreneurs learn how to market and promote their businesses. You might have a strong product or service. But if no one knows about it, your small business will fail. This means learning how to sell on Google Ads, Facebook and Yelp. It means developing relationships with possible customers and promoting yourself on LinkedIn.
And most of all? Anderson says all entrepreneurs need to make sure that if their business fails, it won't wipe them out financially.
"Plan to fail," he says. "If your business doesn't work out, how do you wind it down without devastating yourself financially for years to come? If you can't wind it down, you're not ready to go all-in yet."
For more articles on personal finance, be sure to check out our learning center.
Viewing 1 - 3 of 3
Want To Purchase A Franchise? Read This First
If you’re tired of working for someone else, you may have considered starting your own business. We’ve outlined some key considerations and how to determine if this could be the right business move for you.
What Is A Personal Loan And How Does It Work?
A personal loan might be a good option if you’re needing cash fast. Read our article that goes over the different types of loans and if you should consider one.