Are you thinking about starting a small business this year? If so, it’s important to note that many businesses take months or even years to become profitable. As a result, aspiring entrepreneurs have to take steps to ensure they are prepared before jumping in. Not only must business owners find startup funding, but they also need to save up enough capital to cover their living expenses before they can start drawing a salary. Here are five crucial steps to take to become financially ready to start a business.
1. Calculate Startup Costs
It’s important that you calculate your startup costs before leaving your job to start a company. While the Small Business Administration estimates the average cost of launching a business at $30,000, the fact is that startup prices vary dramatically based on many factors, such as geographical location and business type.
For example, restaurants and retail shops require a greater initial investment than companies that operate online. Along with rental properties, business owners with brick-and-mortar locations need to be prepared to purchase furniture, computers and décor, along with insurance for fires and regional-specific natural disasters (e.g. earthquakes, floods, hurricanes, etc.).
While online businesses tend to be less expensive, e-commerce entrepreneurs are still responsible for certain costs. Along with incorporation and licensing fees, online startups must find funding for website development and online advertising, in addition to manufacturing and employee salaries, if applicable. Determining your startup costs is a crucial part of assessing whether or not you can afford to go into business for yourself.
2. Determine Living Expenses
Along with the costs associated with launching and operating a business, aspiring entrepreneurs must be prepared to support themselves during the period before the company becomes profitable. The fact is that personal expenses don’t fall by the wayside just because you start a business. Additionally, new business owners should be prepared for any additional costs associated with out-of-pocket healthcare premiums. As a rule of thumb, entrepreneurs should save up enough money to carry them through six months of operation before leaving their day jobs.
3. Build Your Credit
It’s no secret that the average business requires some amount of funding to get off the ground. Because your personal credit history can affect your ability to secure a business loan, it’s a good idea to review your current credit level and build up your score. If you’re comfortable with the prospect of using your home as collateral, you may also want to assess your home equity to determine if you qualify for a home equity line of credit.
If you’re concerned that your credit score will prohibit you from securing lending, you may want to wait to leave your day job. After all, banks tend to be far more willing to lend to someone with a regular paycheck. Additionally, aspiring business owners can consider alternative lending sources like venture capital companies, angel investors, government loans and even crowdfunding.
4. Consider Your Tax Burden
If you’re accustomed to working as a conventional employee, you may not be prepared for the upfront tax burden that comes along with self-employment. Because small business owners have to pay self-employment taxes along with federal and state income taxes, it’s important for entrepreneurs to consider their tax obligations and save appropriately.
Additionally, aspiring business owners should do their research regarding potential write-offs, and track expenses thoroughly. The last thing you want to do is miss any valid deductions when your business is still struggling to get off the ground.
5. Assess Your Prospects
Starting a new business means the chance to be your own boss while building something you care about from the ground up. Unfortunately, in the excitement of launching a company, many entrepreneurs fail to assess their profit potential accurately. Just as startup costs vary based on business type and location, so too does the average monthly income a business owner can expect to generate.
Before opening a business, it’s crucial to assess how much money you can expect to earn by performing market research on your industry and customer base. After all, you don’t want to invest more in the company than you can reasonably expect to make back in the coming months and years. On the other hand, failing to raise appropriate capital can leave you with insufficient supply to satisfy your customer base. The last thing you want is for your customers to lose interest or turn to your competitors because you can’t meet their demand. This is why many experts recommend projecting operating expenses with your best-case growth scenario in mind.
It’s a myth that you have to be independently wealthy to start your own business. Aspiring entrepreneurs, however, should be ready to accept the financial realities that come along with small business ownership. By doing your research regarding costs and profits, and building up a sizable nest egg before leaving your day job, you can give your new endeavor the best chance at succeeding.