Starting a Small Business PASBDC Edition

Starting a small business can be a daunting task. Many people are deterred from creating a small business due to the fact that they do not even know where or how to begin. Starting a business is not small task, and takes much time and effort. However, the process of beginning a new business can be broken down into a few key steps.

Preliminary Evaluation

Any small business begins with a vision and dream — this includes creating an idea that you are passionate about pursuing, and see as a viable path to creating income. Many people create a small business based upon what they love to do, are good at, or what they deem necessary or useful to the world around them. In the words Thomas Edison, “I find out what the world needs, then I proceed to invent it”. This mentality, paired with ambition and passion towards a subject, embodies the first stage of creating a small business. Within the preliminary evaluation stage it is essential to see what target demographic and market your potential business would appeal to, and why. A vision or dream without backing, research, and calculations is just that: a dream.

An in-depth business plan and outline are not necessary during this stage of starting a small business. However, a general outline of how your business would function, who you would sell to, and how you can differentiate yourself from others within a given industry is key. The preliminary evaluation stage of starting a small business is creating and testing the feasibility of your business idea. Furthermore, anyone looking to start a small business should set goals, both short-term and long term-, after establishing feasibility of their business concept.

Business Formation

Business formation is the next step in starting a small business. Essentially, this portion of the process consists of three main elements. These elements are essential to the success of any small business.

Name and Form

After creating your business idea you are going to need a name. This name can be simple or complex, but is essential to the success of your business. Registering a name for your business is the beginning of building your brand. The name should reflect aspects about your business that differentiate you from competition.

Employer Identification Number (EIN)/ Tax Registration

An EIN is a unique nine-digit number that identifies your business for tax purposes. An EIN will allow you to make use of some key features for your business, such as creating a bank account. Furthermore, an EIN will allow for proper tax registration for your business with the IRS. There are numerous ways to apply for an EIN, including online or through the mail. A potential small business owner will need to contact the IRS about creating an EIN, regardless of the application method. Furthermore, an EIN will ensure that you do not fall into some very detrimental tax problems.

Bank Account

A bank account for your business is essential. A business account will allow you to differentiate personal and professional funds. This differentiation helps in numerous ways, predominantly with organizational and legal purposes. Furthermore, a business bank account will add a layer of professionalism to your business. Opening a business account can be a lengthy process, and differs from business to business. An in-depth guide to opening a bank account for your small business can be found here.

Business Plan

The business plan is an essential, and very critical, part of the process of creating a small business. A business plan can be viewed as the skeleton for your business in which you intend to later “hang the flesh”. Fundamentally, a business plan forces you to do a few things. First, a business plan causes you to think about your business in an organized, specifics, and critical manner. Furthermore, a business plan allows for you to evaluate the financial feasibly of your business in a more in-depth manner.

Successively, a business plan will allow you to anticipate and address operational issues on the front end; this is always much easier than dealing with problems on the back-end, in a reactive manner. Finally, a good and thorough business plan allows a business owner to persuade potential clients and investors. For example, banks that you may need to work with to obtain a loan or other financing options.

For many reasons, creating a business plan is often seen as a very daunting task for new and potential business owners. However, despite many business plans very in-depth, there are a few key similarities between all business plans. Primarily, your business plan needs to disclose all assets and loans. In turn, these disclosures will give a well-rounded view of the financial standpoint of yourself, and subsequently your business. These standings will come in hand in the next stage of creating a small business, financing. The financial breakdown of your business in your business plan needs to be clear, concise, and most importantly honest. Honesty will result in the most accurate business plan.

Financing Decisions

Financing decisions are integral to starting a small business. After all, many people do not have the funds to begin their small business out-of-pocket. Therefore, securing the necessary resources to start your small business a critical aspect that cannot be overlooked. Financing for your small business can come from many places, but here are a few that many people utilize on their paths to success.

Commercial Banks

Commercial banks offer various forms of financing for starting a small business. One of the most utilized methods of obtaining financing from a bank, loans, allows you to put down collateral in return for large sums of money. This collateral can come from many different sources such as your home or car. Putting something important to yourself, such as your home, up for collateral can be a large leap of faith. Furthermore, these choices can be very scary. Therefore, it is essential that you are ready to take this leap of faith and are properly prepared before utilizing any assists for collateral. Preparation, such as a through and well-rounded business plan, will allow hep to mitigate some risk.

Along with collateral, many banks will want or need a potential loanee to have a percentage of the capital that you are looking to receive. This percentage can vary from person to person and bank to bank, but many commercial banks aim to see that a loanee has about 20% of a capital contribution. For example, if you are looking to take out a $100,000 loan, many commercial banks will ask that you have at least $20,000 of capital to put down.

Commercial banks also look at outside factors before granting people loans. These factors include a credit analysis that consists of aspects such as credit rating, credit capacity, and credit condition. While these some of the primary details about potential loanees that commercial banks inspect, they are not all-encompassing.

Non-Banking Options

A helpful option for people who do not want to utilize a commercial bank, or are unable to, are Small Business Association (SBA) loans. SBA loans are loans that have somewhat higher interest rates, but offer other benefits that are not common in commercial banking. For example, an SBA loan offer requires less collateral at 20% versus commercial banks’ 100%. Furthermore, SBA loans often require a lesser capital contribution of around 10% versus commercial banks’ 20%. Furthermore, the SBA is willing to take on higher-risk clients than most commercial banks. SBA loans are valuable resources in terms of financing a small business.

Another non-banking option for financing the start of your small business is to utilize investors. Investors can come from a variety of places. For example, family and friends that want to support you can often be great potential investors. Influencing investors comes from pitching the validity and feasibility of your small business. These traits are drawn from heavy preparation. Many times this preparation is linked to other aspects of starting small business, such as a meticulous business plan.

Aside from investors many people utilize personal savings and credit to finance their small business. These methods can be more risky, but are feasible options in many cases.

Execution

The final step in the process of starting a small business is execution. It is important to follow your business plan. However, know that your business plan is not a static entity–changes and adjustment based on the results are important. Continuous improvement and reviewal of a business plan will allow for an innovative small business. Furthermore, your local SBDC is always a viable and helpful resource for further consulting at any stage of your small business development!

Written by Brian Kennerly, Pennsylvania SBDC Lead Office Marketing Team

Brian Kennerly is currently a Graduate Assistant at Kutztown University of Pennsylvania while pursuing his Master’s in Business Administration. His hometown is Upper Darby, PA, and he attended the University of Virginia for his undergraduate career.