Critical Topics to Explore Before Starting a Small Business

Critical Topics to Explore before Starting a Small Business

May 5, 2004

A business plan is a fundamental tool to help outline strengths and potential obstacles that could be devastating to your new business. Using this tool, you will illustrate for yourself and/or potential investors your approach to business as well as communicate your direction, and reveal your plans for acquiring new clients and building them into loyal customers. A well thought out plan will define goals for your business’ future to ensure growth. “One common myth is that written business plans are only good to submit to bankers to obtain debt financing or to investors to raise capital.” (Clark, 2004)

An entrepreneur needs to research various funding sources before starting their new business. A traditional resource for financing a new business is a bank loan however “only 50 percent of small businesses survive past their first year of operation (according to the Small Business Administration) so banks are notoriously reluctant to lend money for startups. Typically, you?ll need to show at least two years of profitability to win a conventional bank business loan” (Bedway, 2004). This source of funding may be harder to obtain for a small business entrepreneur than other funding sources especially if they do not have a great deal personal assets.

The line of credit on a credit card can be easy to use to finance a new business but this can be very expensive compared to the interest rates of a bank loan or Small Business Association (SBA) Loan. Home Equity Loans have lower interest rates than credit cards but if your business fails you could also lose your home.

Having family members or friends as investors in your new business can be an advantage since they believe in you and want your business to succeed. It could be a disadvantage if they want to have a say in how you run your business or if financial problems cause them to lose money. You may loose them as a friend or cause difficulties inside your family.

Often small business owners occasionally will start their new company with personal savings. While this may save on finance charges it could leave the owner without the cash needed for personal emergencies or personal debt management while their new business is growing to point where it can pay the owner a salary.

Workforce and environmental regulations, licenses, permits, workers compensation, unemployment benefits and partnership laws are some of the many legal aspects to consider before opening a new business. “One of the main reasons small businesses fail is because they don't seek legal help at critical development stages.” (Business Laws, 2004)

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