How to Start a Startup | Part 3
Setting up a small business is not a small undertaking and managing a small business is even more difficult. In How to Start a Startup | Part 1, I discussed the first two of nine steps to start your own company, and in Starting a Startup part 2 I went into a lot of detail on the business plan. Today I’ll go over the last couple steps and really focus in on the finance portion of your business.
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Just to go over it again the general steps are:
- Get training, assistance, and network constantly
- Do research and analysis of your idea
- Analyze locations and costs
- Analyze financial requirements and if its feasible
- Write business plan
- Form LLC and register DBA
- Begin process to obtain any licensing or permits (once you receive financing you start owing interest. Get everything time consuming accomplished beforehand)
- Finance your business
- Put your team together - Outsource accounting, HR (payroll, tax withholdings etc), Tax responsibilities (sales tax, quarterly and yearly filings) – The government has made it far too difficult for anyone to do this on their own and it is a mine-field, exposing you to fees, fines, and lawsuits.
- Find a good accountant and he will know everyone you need to know
- Get training, assistance, and network constantly
- Revise business plan within the first 6 months
Financing your business
Everything comes down to money. Having money to start your business is the most important step because no matter how good your idea is it will never get started without money. Financing your business really comes down to two parts. First, you need to have your own financial house in order. Second, you can seek financing for your business idea.
Related: Is Real Estate a Good Investment?
Your Personal Finances
This is a very interesting part of the whole process. In our society, most people borrow to the maximum level they can afford by financing expensive houses, cars, boats, etc. Unfortunately, this drives a cycle of dependence on your job and stops people from being creative and starting something new. The first step is to break this cycle in your life so you can be free of dependence. Looking back at those last sentences, I think I’m writing a piece for AA or NA. In some ways your job is like a drug. It feeds the cycle of consumption and locks you into your position in life.
I believe we should look at two major areas of our lives to improve our personal financial situation – personal consumption and false investments.
This is really basic but actually overlooked a lot. Reducing your personal consumption can help you save money and get out of your job faster and into your own startup company. By looking at our own personal finances, my wife and I were able to find over $500 in monthly savings just by making very small adjustments to our lifestyle. Here are a few things to consider to reduce your personal consumption:
- Pack your lunch: Savings/month $160
- Packing a lunch and water will save you around $8 per day over buying food and a soda. Not only that, it’s much healthier than eating out every day.
- Reduce restaurant visits: Savings $100
- Reducing just two to three visits a month will save a lot
- Update your phone bill: Savings $30
- Most people don’t realize their phone bills are too expensive. Data plans have become much cheaper than even just 3 years ago. Applying “out of contract” discounts on to your plan or adjusting your plan to fit your actual usage can save another 30-50 per month
- Cancel unnecessary subscriptions: $100
- The $10/month membership at the gym you never go to, the $40/month for the security system you never turn on, the extra $30/month for extra channels you never watch. Go through everything and really cut them out.
You can see by just changing a few very small things, we have saved $400 per month. I am not talking about saving money just for the sake of savings - what I truly mean is how you can tailor your lifestyle and reduce the unnecessary parts so you can ultimately chase your dream of your startup and being independent.
A fake investment is anything that people think is an investment but is actually a liability. I have written in several places on this website the definition of investing – committing money to something with the intention of returning more money. So, an investment must be something you use that money on in order to return more money.
Sales people are often taught to call their product an investment. After buying a phone you are told to protect your investment with an add-on such as a screen protector or case. After ‘investing’ in your nice ride, you should protect that investment with a nice warranty and service package. Really, they are just selling you a product and using nice words to make you want to buy it. Here are a few of the biggest false investments:
- Your house
- Your house is your largest monthly payment and it returns nothing. Everyone needs a place to live, but let’s not confuse it with an investment. Choose your house wisely and do not purchase more than you need to. Renting is a good option as well because it will not show up on a credit check and be calculated into your debt ratio.
- Your cars
- Cars are big liabilities but are also essential. Just because you can afford that new $50,000 Lexus does not mean you should. Your goal is to be independent and manage your own business. This $700/month payment will surely make you think about staying in your job a bit longer
- Phones, computers, TV’s, washer/dryer and other expensive products
- These are often thought of as investments because they are expensive, but they are just products. Often the businesses offer great financing options so you can "invest" even more than you can afford.
Money for your Business
There are a number of ways to raise money for your small business from personal financing to private investors. The goal is to get off the ground, so any way you can find financing is better than never starting.
Related: Can I Start a Successful Business?
Your first source of funding should be your own savings and credit. If you have been saving properly, you should have a good amount of money to put into your business idea. Additionally, you also have credit which can run day-to-day needs for the business such as acquiring inventory or paying utility bills. It is good to leave some credit open so you don’t fall into a liquidity problem where you owe money now but won’t receive payment for a few weeks or month. That credit allows you to cover some expenses until you are paid
Banks are very hesitant to lend on a new business. The fact is a large number of startups close and may default on their loans. One way to overcome this is by utilizing the resources of the Small Business Administration (SBA). If you work with one of their advisors, you can receive SBA backing on the loan, which essentially means if you default, the SBA pays back the bank. It makes the bank more willing to lend to you.
You can also consider getting a personal loan, Home Equity Line of Credit, or other financing that they may be willing to extend to you simply based on your personal credit or assets.
Friends and Family
Before you go to a private investor, consider doing your first round of financing with friends and family. It is sometimes weird to solicit family for money, but it’s good for a few reasons. Private investors will want a substantial piece of your business if you are a fresh startup company. Once you are established with an income stream, they will take a smaller portion of the business when they finance it. Additionally, showing you have invested a lot of your own money and also that you are willing to risk the money of your friends and family shows you have a lot on the line.
You can offer friends and family an equity stake in the company or simply offer to borrow and pay it back. If your ultimate goal is to go public or to sell out to a larger company, an equity stake may be a good option. If you plan to maintain the business for a long time, perhaps consider offering to borrow their money instead.
A private investor will offer to finance your idea in exchange for a large portion of your company. If you are a brand new company with no history, they may take as much as 70-75% of the ownership of your company. As you move along and create a history, you will have more ability to borrow from traditional sources, so you have the ability to negotiate down the equity portion to 40-50% or even lower. If you have an amazing idea and plan to sell out in a few years, this is a great route to go. If your idea is not so unique and special, private investors may not be the route for you to take.
Putting Your Team Together
This is a really important part of your plan. You cannot succeed in business alone so you will need to be surrounded by excellent professionals that can help you grow and achieve your goals. Your team consists of everything from professionals with advice to having the proper employees.
You will need a good list of professionals. This can be very hard to build if you don’t already know people, but I have found that networking is the best way to do it. Of course you can visit your local chamber of commerce meetings to find those accountants and attorneys. In my personal experience, I have found that accountants seem to know just about everyone and they have long lists of referrals. By choosing an excellent accountant to be your advisor, you can also tap into his extended network of professional referrals.
Additionally, you will need an attorney that understands your particular field. This is very important because every industry is different, so you absolutely need someone who understands those nuances. A real estate attorney is not a good fit for the food and beverage industry or manufacturing. You may even require a few different attorneys to advise you on different aspects of your business.
Find someone to balance your style. I am a very big picture thinker and I am fortunate that my wife is detail oriented. I’m also very fortunate she is my business partner and balances everything out. I could never be successful without her on my team because regardless of how great my ideas are, I need someone to work out those details and make everything fit together. I strongly believe no one has every skill and ability required to be successful. You need to look at yourself and know where you are weakest and then either partner with or hire the right person to balance that.
You will not handle all aspects of the business “in-house” and you will need to find other companies to do this work from time to time. It could be logistics, payroll, human resources, landscaping, and a lot more. It’s better to anticipate your needs and build those relationships before you start than to be caught off guard and need something but have no way to get it done.
I have covered all the core steps of starting your startup company. The remaining two steps are just reviewing previous steps. You should never stop networking and learning. Additionally, it is really important to review your business plan once you have some solid data to base it upon. Like I said before, everything is just made-up before you start because you have no history to base it on. Once you have this data you can create good projections and goals.