Do your market research
The biggest reason why new businesses fail is because there is a lack of market demand. Past research from startup failure post-mortems have shown this to be the case. Businesses that are tackling problems that are interesting to solve rather than serve a market need are oft bound for failure. It is no wonder that one month after Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris started the Y Combinator seed accelerator in 2015, they picked “make something people want” as their motto.
To side-step this common pitfall, you need to conduct market research and understand your consumer base from the outset. By conducting research from the get-go, you are reducing your risk as you are able to run your business idea through a validation process without you having to sink significant investments. To get a good sense of your market, you may want to seek answers to the following questions:
- What pain point does your product/service solve?
- How many people would be interested in your product/service?
- What are the demographics of your target audience?
- Is the industry saturated with alternatives to your product/service?
- What is the competition like? What are their competitive advantages?
You may choose to conduct your own market research by organizing your own focus group or conducting surveys, questionnaires or in-depth interviews with your target market. Research can be very time-consuming so we encourage you to take advantage of public information. For instance, the Small Business Administration has compiled a list of reliable sources that provide market and customer information at no cost.
Plan your finances
Small businesses, especially one that is just starting out, tend to have low available capital. There is the option of using your personal savings but a much better alternative would be to look for business financing as it is a good tool to help you build and grow your business. There are a myriad of business finance options in the market, with new businesses in mind, and you should spend time to see what is available and best for your business. There are small business grants available depending on your registered business location as well.
At the beginning stages, you may want to consider short-term financing so that you may commence or prolong operations long enough to stabilize your cash flow. These could be obtaining trade credit with suppliers, applying for an overdraft, or approaching business lenders for a short-term loan to improve the business’s working capital. This could then allow businesses to remain operational long enough to collect cash from customer accounts or make additional sales to repay the borrowed capital and improve cash flow.
Draft up your business plan
This is a continuation of the previous point. A business plan may not be a prerequisite but it is best to include it in your business loan application, especially with traditional financial institutions, to increase your chances of success. As you are just starting up a business, you are not able to capitalize on your time in business to demonstrate your business’ stability. Hence, the business plan should explain how the loan would be used and the size of the opportunity you would then be able to capitalize on. It should also identify the key risks and challenges as well as strategies to manage them. A well-thought-out plan would also include a timetable to achieve your business goals and financial projections.
Choose your business location
Before you file any paperwork, you need to research on where is the best place for you to locate your business. This is essential because you will need to register your business, pay taxes and apply for licenses and permits based on the regulations of the location. You should take a look at the cost, benefits and restriction of different government agencies on the city as well as state level. For example, Texas is known for its low business tax rate and lack of an individual income tax which makes it an attractive low-cost center to do business.
Most entrepreneurs will also locate the business based on a variety of factors such as access to the target market, proximity to business partners, existing industry clusters as well as the cost of living. For instance, several tech companies were already questioning if a centralized HQ in an expensive business cluster, such as the Bay Area, could be justified in light of new tax laws, rising rents, and an urgent demand to attract and retain top tech talent who may not be keen to relocate to the big cities.
Choose a business structure
Now that you have chosen your business location, it’s time to choose your business structure. For entrepreneurs like yourself, your small business can be a sole proprietorship, a partnership, a limited liability (LLC) or a corporation. Under these common structures, there are sub-types as well. For instance, there are two common types of partnerships - limited partnerships and limited liability partnerships. Though similar in name, they are significant and distinct from one another.
It is extremely important that you take a look at each option and choose a business structure that gives you the right balance of legal protections and benefits. The business structure you choose, depending on your state location as well, will influence many aspects of your business such as day-to-day operations, required taxes as well as how much of your personal assets are at risk.
For instance, first-time entrepreneurs may choose to form a sole proprietorship because you have full control of the business and it is easy to set-up. However, sole proprietorships do not produce a separate business entity. This means that you are not protected by the corporate veil and can be held personally liable for the debts and obligations of the business.
As such, you may want to consider seeking counsel from an attorney, business counselor, or an accountant so that you may make an informed decision when setting up your business.
Choose and register your business name
It’s time to give your business a name! Choosing a business name is important because you want to ensure that your name is distinct and not easily confused with another company. Name confusions happen more often than not. Already, this year, we saw so many retail traders wanting to purchase stock in the encrypted messaging app, Signal, after Elon Musk’s tweet calling for people to use the platform. Unfortunately, many bought stock in a small company called Signal Advance, and Signal had to publicly clarify that the two are unrelated.
It’s also important to think about the various business name registrations your business will have to undergo. For instance, you may be legally required to register a Doing Business As (DBA) name and you may be keen to register an entity name at the state-level as well as a domain name for your online website. These name registrations are legally independent. Although it is not a requirement to use the same name for each, most businesses will try to do so for avoidance of doubt. As such, you may want to check that the name you have chosen is not currently in use or previously registered.
Get the necessary licenses and permits
Starting a business usually means that there is much paperwork to be done at the beginning. However, once the right paperwork has been filed, it becomes much easier to manage. This is the case for applying for your business licenses and permits. Most small businesses need a combination from both the federal and state agencies. The requirements, and its associated fees, are based on the type of business activities, the location of your business and existing government policies. Once this has been done correctly, the process of renewing the various licenses and permits will be a lot easier than filing a new one.
Open a business bank account
As a first-time entrepreneur, it is vital for you to have a business bank account that is separate from your personal one.
Business banking offers limited personal liability protection by keeping your business funds separate from your personal funds. This is important as businesses, such as corporations, can be regarded as a separate legal entity from its owners and thereby, requires its own dedicated account. This also prevents you from unnecessarily sharing details to your personal account as business accounts allow for multiple signers. This means that your partner or employee can take over the administrative or financial duties while you focus on other revenue-making aspects.
Having a separate bank account means that you do not have to untangle your personal transactions from your business ones which will indefinitely make yearly bookkeeping easier, cleaner, and more accurate. This will go a long way to help you manage your business and monitor its profitability. Not only will a business account help you file taxes accurately and on-time, you are able to deduct business expenses from your tax return and use these account statements as proof to IRAS that these are legitimate expenses.
With a separate business bank account, you are able to apply for a corporate credit card. With this line of credit, it can help with your business cash flow as you are now able to make purchases to help fulfill business orders. Without it, you may not be able to have enough cash on-hand to finance these necessary purchases. Additionally, with a line of business credit, you will not be personally liable for business debts.
Obtain business insurance
Although there are some business structures that will grant your business limited liability, it is, as the name suggests, limited protection. In some instances, you may be legally required to purchase certain types of business insurance and this requirement varies by state. As such, do visit your state’s website to find out what is a legal necessity.
However, after assessing your business, you may be keen to obtain additional business insurance to fill in the gaps and reduce your risk. There are various types of business insurance and some may be more applicable depending on the nature of your business activities. For instance, businesses that provide services to customers may want to obtain professional liability insurance. This coverage protects against financial loss as a result of malpractice, errors and negligence. If you are a business that is run out of your own personal home, you can take a look at home-based business insurance. This is coverage that is added to the homeowner’s insurance as arid and can offer protection for a small amount of business equipment and liability coverage for third-party injuries.
Get your business systems in place
As a newly minted entrepreneur, you will soon realize that starting your own business means that you have to oversee many moving parts. This can be particularly overwhelming when you are working by yourself or operating with a very lean team. As such, you may want to take a look at some of the online services or software that is out there so you can ensure you run your business like a well-oiled machine.
A good place to start would be to take a look at accounting software. Maintaining proper bookkeeping is absolutely essential to having a successful business. That said, it can be tedious especially, when you have so much on your plate. This particularly applies to small business owners who have to juggle a large number or customers, employees and suppliers while monitoring inventory and cash flow. There is accounting software in the market that provides small business accounting features such as inventory management, sales tracking, managing a database of customers and supplier contacts as well as keeping track of revenue and expenses. This will not only help you save time to focus on other aspects of your business but it will help you maintain accurate and up-to-date records so you may better assess the business.
We also recommend using Tillful, our free-to-use app that enables you to view and monitor your real-time business credit score. At the touch of your fingertips, you will be able to assess your business’ overall financial health. Furthermore, Tillful will help you understand the factors that affect your small business credit rating, so you may take control of the business’ financial health and unlock capital when you need it.