Thinking About Starting Your Own Business? Begin by Asking Yourself These 5 Questions
Starting your own business doesn’t just begin with a good idea and a business plan. Before you think about launching a business, careful preparation and consideration must go into assessing whether or not your business will be viable. According to the U.S. Small Business Administration, about 20% of small businesses fail within their first year, and a third close within 2 years. Financial preparedness can help small business owners be on the winning side of these statistics.
The following five questions will help you determine if you are financially and emotionally prepared to start your own business and make it a success.
1) Have I saved enough money for 12 months of living expenses?
It’s often said that if a new business breaks even, it has attained a level of success. But if your business breaks even and can stay afloat, are you in a position to cover your personal bills (mortgage, utilities, groceries, etc), and cover any unexpected business expenses? If your business can sustain itself, do you have the capital needed to grow the business so it can make a profit?
It is advisable to save 12 months of personal savings, and 12 months of business savings before you open your doors. Stress over money is debilitating and does not allow you to do your best work. Having a year of financial security before you launch will allow you to focus on your business with minimal stress so you can make clear decisions and stay positive when challenges arise.
2) Can I raise money from my friends and family for my idea?
According to a 2014 Small Business Credit Survey conducted by the Federal Reserve Bank of New York, only 35% of small businesses received funding from big banks. One alternative source of funding is peer-to-peer loans between family and friends. Knowing whether you can or cannot receive capital from friends and family will give you more information than you might expect.
If friends and family respond favorably to your request for start-up funds, you might not only have a great source of capital, you may also have a good business idea. If the response you get is negative, the inverse may be true, and you might want to reconsider your business idea. If the people who love you most in the world aren’t sold on your idea, or your ability to execute it, it’s unlikely a bank will be more supportive. Having financial backing from friends and family is not just access to capital, it’s an affirmation of your abilities as a prospective business owner.
Likewise, securing a loan from friends and family can save you time and hassle that you might otherwise face from a traditional lender, but it does carry with it a high level of pressure. It is wise to draft a loan agreement with detailed terms and a repayment schedule, and consult with an accountant to understand the tax implications of such loans. Free loan agreement templates can be found at LegalContracts.com and LawDepot.com, and paid document service is available at LegalZoom.com.
3) Do I have a support system?
Starting a business is a stressful endeavor. Having a network of supportive friends and family can not only help alleviate some of the emotional stress, but friends and family can also offer practical help when needed for such things as childcare and personal errands.
It is also important to have a network of people you can rely on for business support when you need guidance in areas for which you have less experience. Being able to rely on former colleagues and employers, or having access to family friends with proven business experience, will be invaluable when facing new challenges like hiring staff, organizing the division of labor, or designing an effective marketing plan.
Take an assessment of your friends, family, their connections, and the sphere of influence you’ve cultivated in your career to determine if you have an adequate support system to help you succeed.
4) How well do I know my market?
If your immediate answer is anything less than, “I know it inside and out, better than anyone else on the planet,” you should pause and take stock of your market knowledge.
Many businesses start because after years of experience in a field, someone saw that it could be done better. It’s not enough to recognize a gap in a particular market if you don’t have the experience, skills, and resources to execute your plan.
It is recommended that, as a prospective business owner, you have direct experience in the business you want to start, and have spent at least one year working for a company that might very well be your competition. You can’t know how to do something better if you haven’t done it before.
5) Am I a social media expert?
Whether you like using social media or not, it is the way of doing business in the 21st century. Two practical advantages to using social media are that it is, in most cases, free, and it doesn’t require in-person networking, which is not within everyone’s comfort zone. The more places you and your business appear online, the more easily potential customers can find you, and if you’re not online, those customers are finding your competition.
LinkedIn is a great networking site that allows businesses to reach potential customers, network with peers, cultivate relationships with possible board members, and look for talent to join your team. If you’re not already on LinkedIn, you should create both a personal profile and a company page to promote your brand through your unique content. Spend time each day building connections and researching your industry. LinkedIn is a valuable tool for staying up-to-date with industry news, keeping tabs on the competition, and being in sync with contemporary marketing practices.
Facebook, perhaps one of the most commonly used social media tools, is a great forum to communicate with the public more informally than LinkedIn, allowing you to showcase your business’s personality. For many businesses, like those not involved in e-commerce, Facebook has replaced the need to have a traditional website altogether, saving money and time. Facebook, and popular photo sharing app Instagram, also offer flexible and affordable advertising programs with powerful market targeting tools to reach potential new customers.
Social media is here to stay, and that’s a good thing. Becoming comfortable using these resources will help build your brand, increase your market reach, and if done well, should lead to creating a following of loyal customers.
After answering these 5 questions, you should have a good feeling whether or not you are prepared to start a business. If you’re not prepared, these questions should guide you toward what steps need to be taken to become financially and emotionally ready to launch your idea. If you are prepared, you have both the financial and emotional resources to give you the best chance of starting a successful business.