Starting a new business is an exciting time but there’s a lot to think about, too. So, where do you begin? We’ve broken down the basics that explain how to start a small business.
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You have a stellar business idea – but is there a market for it? Understanding if there’s a need for a product or service like yours is the first step to launching your business. This requires market research. The information you obtain will help you develop your product or service and attract customers.
Follow these easy steps and you’ll become a market research aficionado in no time.
Most industries publish reports online that highlight trends and sales figures. Even if you have a niche idea you can probably find information about some aspect of the market your concept relates to. You can also check out trade publications for more information that will help you figure out if your product or service might perform.
Before you open for business, you’ll need to have a good idea of the type of customer that buys products and services like yours. The U.S. Small Business Administration (SBA) provides free demographic information that will help you determine which consumer groups are more likely to be interested in your products or services based on their purchase patterns. When you know your target audience, you can better market to them with relevant messages that lead to sales.
Once you have an idea about who your customers are, it’s time to get to know them better. You can create a poll or survey through one of many online services that specialize in market research. You can also create a poll on social media to ask people questions about their needs and what they desire in a product or service.
Examples of questions include:
The information you obtain will provide you with valuable insight to help build your business.
No matter what your industry, you’re going to have competition. It’s part of doing business. So, get to know the other companies that offer a similar product or service. Researching the competition helps you understand what you’re up against and learn how others have succeeded – or not.
Reading reviews, interviewing customers, and conducting surveys are effective ways to get this valuable information.
There’s nothing that replaces testing a real-life prototype. If you’re making a product, create a sample and let others try it for free to capture their honest feedback. If your product is complex or expensive to make, you can create a scaled-back version of your business idea to test the waters. Once you see how customers react, you can make adjustments as needed.
Whether or not you’re pitching to investors and lenders, starting a business requires a plan.
A sound business plan gives you direction, helps you qualify your ideas and clarifies the path you intend to take toward your goal.
The following exercise will help you gather the most important information. You can expand and add more details later. Once you have an outline, you can start building your business plan. Follow this standard business plan guide to help you formalize your plan before sharing it with your business partners, investors or banks to promote your concept.
A business plan is a work-in-progress. You can revisit it as your priorities change and to help you stay on track and keep your goals in sight. If you need help getting started writing your business plan, the SBA offers free templates based on different business structures if you need additional help organizing your thoughts.
You’ve done the research for starting a new business and created a solid business plan. Now it’s time to make it real.
As a new business owner, you’ll need to follow a few steps to make it official, including:
Once you name your business, one surefire way to legitimize it is to register with local and state governments. Before you do though, make sure other businesses don’t already have the same name, especially if you plan to use it for a website or a trademark.
Most states have a business name check tool as part of their online business services pages that you can use to make sure your business name isn’t already taken. The SBA suggests registering companies in four ways:
One of the most important steps you should take when you start a business is deciding your business structure.
Options include sole proprietorship, partnership, limited liability company (LLC) and several kinds of corporations. Not sure which structure applies to your business? Find out more here.
Choosing your business structure formalizes your business and lays the groundwork for other important decisions. This decision will inform how you pay taxes, raise capital and protect yourself from risks.
A business address can help protect your personal privacy. If you use your home address, it will be publicly listed as the business address after you register your business. Some states or legal entities allow P.O. boxes or virtual addresses, but many will not, so if you use a P.O. box as your business address, you might have challenges.
Just like people receive a Social Security Number, businesses receive an Employer Identification Number (EIN) from the Internal Revenue Service. Head to IRS.gov to sign up for an EIN, or federal tax ID number, for your business. This number comes in handy when you open a bank account, apply for business licenses and pay federal taxes. You can also use your Social Security Number if your business is a sole proprietorship. Check with your state’s Department of Revenue to determine whether your business needs a state tax ID, too. Not all states require them. If you need help, don’t hesitate to consult with a tax or legal professional.
Check with federal, state, county and local governments to see if your business requires any permits or licenses. If a federal agency regulates your type of business, then you’ll need a federal license or permit. States generally license more broadly, covering everything from restaurants and retail to construction.
Don’t combine your personal bank account with your business funds. It’s smart to separate your personal and business finances, making it easier to track company expenses and income.
Account options include business checking, business credit cards and merchant services, which allow you to payment solutions that give you the flexibility to accept payments from customers online, in-person or on-the-go. Having a business bank account also helps your company establish credit.
Consumers expect convenient ways to pay. That includes online, mobile and in-person payment options. This means making sure you’re set up with a payment solution that allows you to accept credit and debit card payments and other contactless payments. Believe it or not, some customers will take their business elsewhere if a merchant doesn’t accept a preferred method of payment.
Purchase insurance to protect you and your personal finances. Then if the worst happens – property damage, liability or an injured employee – insurance has you covered. Note: Workers’ compensation laws and regulations differ by state. Small businesses also should consider a business owner’s policy that combines property, liability and income insurance. This will cover missed income if your company can’t operate during a loss.
With these structures lined up, your business will be more solidified. And customers will be reassured that you are legitimate.
You have a business plan, a registered name, a dedicated business checking account and a way to accept payments. Now it’s time to figure out how you will fund your new venture and manage your cash flow in the early stages.
It costs $30,000 on average1 to start a small business. According to the Federal Reserve, the top funding source for new businesses are:
Here are the different types of business funding available for small businesses and what you need to know to decide what kind of funding is right for you.
Nearly 6 in 10 entrepreneurs use their personal savings to start their businesses.3 If you factor in personal credit cards, home equity loans and other personal funding, that number jumps even higher.
Tips: Legally registering your business with your state — as an LLC, simple partnership, S Corp or C Corp — can help limit some of your personal liability.
Create business bank accounts and credit cards in your business’s name, even if you use personal savings to fund them. Business lenders look for a credit history for the business itself, in the business’s name.
Friends and family provide another potential resource for funding your business. You may find that your support network wants to support your new venture. But there can be strings attached. Beyond any potential damage to personal relationships, it can become complicated when it comes to taxes and legal risks.
Tips: Have a frank conversation about terms and expectations before you borrow from friends or family. Be sure to discuss the amount, payment schedule and interest rate, then document what you decide.
Global investment through crowdfunding is expected to reach $96 billion by 2025, according to the World Bank.4 Fundraising is often done via a third–party website, and investors often expect sample products, recognition or equity in exchange for their donation.
While this type of fundraising is used for more than just business ventures, many of the most popular fundraising campaigns have been for new products or businesses.
Tips: Read the fine print to understand what protections and liabilities you have before using these sites. While they can be a great and innovative source of funding, there’s a lot of unknown risk.
Business credits cards offer many advantages, including rewards, high credit limits, and the opportunity to build business credit.
Many banks offer SBA loans, which are small business loans partially guaranteed by the government. Financial institutions usually prefer that a business have a credit history and record of income before approving traditional lending. However, SBA loans offer business owners the opportunity to take advantage of favorable terms, while removing some of the barriers to traditional financing options.
The funds may be used for vehicle purchases and refinances, equipment purchases, working capital, inventory and other general business needs. Read more to explore the different types of SBA loans available to small business owners.
Online lending may come from a variety of sources. It could be from a traditional bank, like U.S. Bank. It could also come from an online-only lender. Many of these online-only lenders lend to businesses that might not qualify for a more traditional small business loan. To do this, they often use less strict guidelines for underwriting. For instance, one company looks at the number of packages shipped and received.
Tips: Read the fine print. Make sure you know the annual rate, the amortization schedule, prepayment penalties and more. These details can help you evaluate whether you can really afford the terms.
While it is more difficult for startup businesses to obtain traditional lending, it may be available. Talk with a banker about your options.
How to qualify for a small business loan
If you’re ready for a small business loan, there are a few criteria that lenders look for.
1. Time in business: Many banks will offer traditional business loans after a business is established for a couple of years.
2. Credit history: If you use one of the methods of funding discussed here to get off the ground, you can still build a credit history by using those funds to open a bank account and credit card for your business. If your business has no credit history, whether you qualify will be based completely on your personal credit history.
3. Performance: Lenders are likely to look at your balance sheet, with a focus on overall profitability.
There’s a saying, “If you’re the smartest person in the room, find a different room.” As a new business owner, it’s important to surround yourself with smart people in different areas who can advise you along the way. This will help you avoid pitfalls and take advantage of opportunities that can help your business thrive.
Find a networking group in your area. There are groups that include members from many industries or are industry specific. Or, join a Business Chamber of Commerce or look for connections on LinkedIn or other social media groups.
In addition to surrounding yourself with the right mentors, it’s important to choose good partners and employees. Here are some tips for surrounding yourself with the right people.
When it comes to lining up vendors, begin as you would when hiring. Spell out what product, material or service you seek, along with the criteria that suppliers must meet.
These requirements might include quality assurance, lead times for delivery, and payment terms and conditions. It’s hard to land what you need if you don’t spell out those requirements first.
Verify vendors by requesting samples or references from other customers. Ask about the quality of their work and the professionalism of their employees. Then check with the Better Business Bureau or Angi, (formerly Angie’s List) to make sure they have a strong track record. It’s also not a bad idea to search for the business online to uncover any major issues like lawsuits or recalls.
Whether you are interviewing a potential employee or vendor, similar guidelines apply. Standardize the questions so that you’re comparing apples to apples. For example, think of unconventional questions that delve into candidates’ skills, such as, “Explain something to me in 5 minutes that you know a lot about.” These types of questions break through rehearsed answers and allows candidates to demonstrate confidence – an important attribute for success.
With this dream team of new employees and vendors lined up, your business will be primed to continue thriving.
Most businesses have a website. It’s often how customers find out about a business. If you sell products or services, you may want to have a way for people to place orders and book appointments. Here are some resources for setting up your business online.
Not sure where to begin? Find the right business banking options for your goals with our product selector.
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