4 Things You Need to Know Before Starting a Small Business

Brought to you by Ty Kiisel at Nav.com. 

Author and small business mentor Michael Gerber, describes the urge to start a small business as an “entrepreneurial seizure.” I grew up in a small business family. My father had a business and I started working there as a teenager sweeping the floors, filling orders, and driving the delivery truck. I’ve also owned a couple of businesses of my own over the years. I think what Gerber is suggesting is that no rational person would do it.

He may be right. But we do it anyway.

There is nothing easy about starting and running a small business, but it was very satisfying to build something from nothing. There were a few things I had to learn the hard way, despite the advice of a couple of more experienced friends that would have made starting my own business much easier. Let’s talk about a few of them.

What Makes a Good Business Idea

A good idea isn’t necessarily a good business. The difference between a good idea and a good idea you can build a business around is that there is a market for your good idea and people are willing to pay you for it. Before you decide to take your idea to market, there are some pretty important questions you need to be asking yourself:

• Does my good idea solve a universally-felt problem in the market? In other words, if people use my product or service, will it help them earn more income, save time, increase their productivity, etc.?
• Would people be willing to pay me for my good idea? In other words, would you have paying customers if you took your good idea to market? And, would they pay you enough to make it worth your while to produce?
• What does it cost me to produce my product or provide my service? Will I make enough profit to use as the foundation for a business?

If the answer is, “No” to any of these questions, you may want to rethink your business idea. It doesn’t necessarily mean it’s a bad idea, but it might not stand alone as an idea to build a business around.

How Much Money Do You Need to Start a Business?

Even in the best of economic times, borrowing capital to start a business is nigh unto impossible. Without income or a track record of success, most lenders will not approve your loan application. Lenders are looking for a steady stream of regular and timely periodic payments. If you can’t demonstrate your ability to make payments, you won’t be able to borrow, so you’ll need some other source of income to get your new business started.

A lack of working capital can ring the death knell for any business, even a business with a great idea, a lot of willing customers, and a profitable business model. If I were to do it again, I would make sure I had a bigger nest egg of savings to carry my business through the first several months to a year or so with the cash flow to make sure I could deliver my products or services to my customers.

Your Credit Profile Matters

For most small business owners, in addition to your business credit profile, your personal credit score will be part of every creditworthiness discussion. You can’t ignore the importance of building both a strong personal credit score as well as a good business credit profile if you intend to borrow capital to fuel growth or fund other business initiatives.

Building a strong profile isn’t particularly difficult, but it does take a focused effort that includes:

• Credit monitoring of both your personal and business profile. We tend to positively impact the things we pay the most attention to and your credit profile is no different. In addition to the major credit bureaus that track both business and personal credit, there are also free services, like Nav, that allow you to monitor both your personal and business credit in one place.
• Look for ways to build your business credit. Although it might not be a small business loan, trade accounts with the vendors you work with and business credit cards are two of the easiest and quickest ways to build a strong credit history. If they report to the appropriate credit bureaus, those credit accounts will help build a strong business credit profile.
• Use the credit you need and stay current. The single most important thing you can do to build a strong credit profile is to stay current with your periodic payments. Building a good credit profile is one of those times when slow and steady wins the race. There really are no shortcuts. That being said, you may be surprised at how quickly following good credit practices will build a strong profile.

What Makes a Successful Small Business

It’s not money, but creative problem solving that builds a successful small business. I call it the Myth of the Shark Tank. Popular media would have every new entrepreneur believe that it takes a lot of money to build a successful business. While it does take capital, it doesn’t take a visit to the Shark Tank, an angel investor with a lot of cash, a venture firm willing to invest millions in your business, or a huge line of credit at the bank to build a profitable and successful business.

Any small business owner who bootstrapped their way into existence will tell you it’s a pretty tough row to hoe, but they will all tell you it took a lot of creatively looking at challenges and finding novel solutions to them that made their businesses successful. I found over the nearly 40 years of my career that the most successful entrepreneurs I’ve known haven’t relied on money to build their businesses, but have relied on resourcefulness and relentless problem solving.

Instead of allowing obstacles to get in their way, they’ve looked for ways over, around, under, or through them.

Operating a business on a shoestring requires a creative approach to overcoming obstacles that sometimes become innovations. Innovations that in the long run can make a business stronger and more profitable.

Most businesses require capital to thrive and grow. Sometimes that comes in the form of investor dollars; for many more it comes in the form of a small business loan or line of credit of some kind, and most small business owners start out by financing their “entrepreneurial seizure” with personal savings of some kind. Nevertheless, those who become the most successful all have one thing in common, they can creatively solve the problems they will inevitably face and overcome them.

Why Start Up a Small Business

For those with the desire to strike out on their own, it can be an incredibly rewarding experience. Building something from nothing is exciting and invigorating, but be prepared to spend a lot of time doing things that are neither fun nor invigorating to do it. The mundane chores like bookkeeping, housekeeping, and managing employees can be tedious if that’s not where you like to spend your time. Unfortunately, particularly in the early days, you’ll likely have to do everything from balance the business books to cleaning the bathroom.

There were many nights, usually around 1:00 am in the morning, when I would get a call from my wife asking me if she needed to bring me a sleeping bag—my cue it was time to come home. She didn’t know it, but I never enjoyed burning the candle at both ends more than I did then. It might not be like that for everyone, but it was how it was for me—and it’s one of the things you should know if you are going to strike out on your own.

Small businesses create two out of every three new jobs in the U.S. and hire roughly half of all our friends and family. Collectively, small businesses are the genesis of everything good that happens in our economy and in our communities. In other words, when you take the entrepreneurial leap, you’re helping us all.