There are 30.7 million small businesses in the United States, and 89% have fewer than 20 employees. Thanks to self-starters, entrepreneurs, and dreamers, these small businesses are an integral part of the nation’s economy and growth. They offer job opportunities, unique products and services, and financial growth to communities and society as a whole.
If you’re looking to join these millions of Americans by starting your own business, you must ensure you’re ready to enter the playing field.
This 10 steps financial checklist will help you get your accounts in order and prepare for financial success before and after launching your business.
- Research Your Market Opportunity
- Pay Off Personal Debt
- Create a Business Plan
- Apply for Loans
- Find Venture Capital and Grants
- Determine Your Business Structure
- Obtain Permits and Licenses
- Open a Business Bank Account
- Set Up Financial Systems
- Explore Business Partnerships
1. Research Your Market Opportunity
Before you begin investing in your small business, you must make sure there’s a market for the services or products you plan to sell. If your idea is nonviable, it’s best to find out sooner rather than later. Then, you may be able to reevaluate your plans and take your business in a different direction.
Conduct a feasibility study early on in the planning process to find your niche and determine whether your small business is worth starting. Please take a look at other companies offering similar products and study their target audience. Where do they live? What are their main interests? Can you compete with other companies that are already catering to consumer needs? Do you have something new to offer your customers?
Discover what potential customers think about your products by conducting online surveys or focus group sessions. Offer participants some form of small compensation to expand your data set and gather more information. If the results are promising, consider hiring a research firm or buying expert market research data to ensure your idea is truly worth pursuing.
2. Pay Off Personal Debt
Many millennials dream of opening their own business. However, their debt can be a major setback — whether from student loans or credit cards. You don’t have to pay off every penny before starting your own business, but it certainly doesn’t hurt.
Reducing or eliminating your debt can reduce personal liabilities and make you more attractive to lenders. Plus, you’ll likely find more funding options and lower interest rates the more you whittle down your debt.
Paying back student loans and minimizing credit card debts can also help you prepare for the expense of initial startup costs. Pre-opening costs may include research and technology expenses and borrowing costs. Depending on which type of business structure you choose, you may have to make a substantial initial investment, so having a fair amount of savings is important.
Additionally, reducing debt will allow you to save for pre-and post-opening emergencies. Early on, establishing an emergency fund will keep your business afloat in the face of unforeseeable events and slow seasons. Plus, it will prevent you from taking out a personal loan and piling up more debt if something goes wrong.
3. Create a Business Plan
Once you determine that your idea is viable and have enough money to fund a startup, it’s time to create a business plan. This plan is the foundation of your enterprise and one of the most important financial steps to start a business. It will serve as a roadmap for structuring, running, and growing your shop or studio on your path to success.
In most instances, your business plan will include your financial goals, operations, cash flow analysis, marketing strategies, and income statements. However, each entrepreneur and business requires a unique plan so that yours may look slightly different than those of your entrepreneurial friends and competitors.
Of course, having a thorough business plan can guide your decisions in each stage of starting and managing your business. However, it can also support your success by helping you find funding. Use the plan as a tool to convince investors and potential employees to join and support you.
4. Apply for Loans
The next step on your business planning checklist involves securing financing to launch your startup. One way to do this is to apply for loans through a credit union or bank. As long as you have a good credit score and demonstrate an ability to repay them, you should be able to score a decent loan at a relatively low-interest rate.
As an entrepreneur with little business history, you may struggle to secure a traditional loan. In this case, you might apply for a personal loan. This type of loan usually has a lower maximum loan amount. However, it also comes with a lower interest rate. After starting your business and establishing it successfully for a few years, you can reconsider a more traditional business loan.
If you’re unable to get traditional financing, you may qualify for loan options through the Small Business Administration (SBA). After determining that you meet all SBA loan requirements, you may choose between a 7(a) loan program, a 504 loan, a disaster loan, and a microloan. In most cases, you’ll find that an SBA loan offers longer payment terms, lower fees and interest rates, and more creative repayment structures than conventional loans.
5. Find Venture Capital and Grants
Sometimes, loans aren’t enough to cover your initial costs. In this case, you’ll have to rely on investors and venture capitalists to support you and your business endeavors. Use the business plan you created earlier to convince investors of your potential. Look for companies and individuals that share your values and believe in your mission. Then, narrow down your options by surveying the success rate of other small businesses with which they’ve worked.
Once you identify a few potential investors, craft a pitch that’ll persuade them to invest in you and your business. Provide a synopsis of your business model, information about your product, and how you plan to maintain and grow your startup. Investors and venture capitalists want to feel confident they’ll see a return on their investment, so give them every reason to believe in you.
If you have trouble convincing investors that you’re a worthy investment, consider applying for a few grants. Most companies award grants to nonprofit organizations. However, you may find one willing to award you with free money with some time and effort.
Visit Grants.gov and search their database or apply for a grant through the National Association for the Self-Employed. Search for the state, regional, and specialty small business grants to find ones specific to your demographic or community.
6. Determine Your Business Structure
Selecting a legal business structure is another incredibly vital component of any business startup checklist. You can generally choose to function as a sole proprietorship, a Limited Liability Company, or a corporation. Your final decision will determine how you file taxes, which business licenses you’ll need, and how you organize your business.
For instance, if you choose to incorporate your business or become an LLC, you may enjoy tax breaks and liability protection. These structures may benefit large teams and those working in a brick and mortar location. However, if you don’t have many liabilities, you may fare better as a sole proprietor in the beginning. Most small businesses are sole proprietorships because they’re the simplest and most affordable to launch.
Most seasoned business owners will recommend that you seek help before choosing a business structure. If this is your first rodeo, you may not fully understand the implications of each option. Why not get some advice from others who have walked this road before you? They may be able to offer some insight and point you in the right direction.
7. Obtain Permits and Licenses
After choosing your business structure, you must register your business name and obtain all necessary licenses and permits.
Of course, the type of licenses you’ll apply for will depend on what kind of business you plan on running. For example, if your services will include therapy, daycare, or financial work, your state may require you to apply for an occupational license. Meanwhile, if you plan to start a home-based catering business, you may need a health department permit.
In some communities, you may also need a zoning permit. Zoning dictates what type of establishments can exist in certain areas, which is crucial to know if you will run a brick-and-mortar business. Contact your city or county’s zoning department to determine whether or not you need to obtain a permit. If you skip this step, you may end up paying steep fees or closing up shop when your locality discovers your business.
You’ll also pay a fee for any necessary permits or licenses. To find out how much yours might cost, go online, or call your city or county office in charge of awarding business licenses. Fill out a form with your information. You’ll then pay a fee upon submitting your application. If your business succeeds, you’ll continue to pay a yearly renewal fee based on your earnings.
8. Open a Business Bank Account
Whether you register as a DBA or plan to do business under your name, it’s wise to open a business bank account. Doing so will allow you to establish business credit and take advantage of small business tax deductions. It will also keep your personal and business finances separate from one another, which will help you keep better track of business expenses.
You might also consider setting up a credit card and PayPal account to add professionalism and credibility to your small business. Customers will be more likely to trust that your business is legitimate if transactions have your business’s name on them instead of yours. Plus, having a business checking account allows you to accept all kinds of payments without using a service provider.
Meet with a business banking specialist to discuss which business checking account is best for you. Many banks have limitations and benefits that can directly impact your finances. For instance, some have cash deposit and transaction limits. Therefore, it’s wise to speak with a professional before opening an account and depositing money.
9. Set Up Financial Systems
Of course, setting up financial systems should be on your financial checklist for starting a business. Current business owners recommend new entrepreneurs set these up as soon as possible to begin tracking inventory, income, and expenses. If your accounting systems are working at the start, you’ll save time and money in the long run.
If you’ve always used a pen and paper to track your finances, it’s time for an upgrade. Create a cash flow spreadsheet and a balance sheet so you can update calculations in real-time no matter where you are. You might also consider using accounting software to automate the process and minimize or eliminate bookkeeping.
Many small business owners also outsource their accounting, especially as their business grows. While adding someone to your payroll system may seem like a major expense, the extra expense will be more than worth it. Hiring an accountant or bookkeeper to keep records and file taxes for you allows you to dedicate your time and energy to your business — and it needs all the attention you can spare in the beginning stages.
10. Explore Business Partnerships
Whether you’re a solo entrepreneur or you’re opening your business with a partner, your growth depends on others. Of course, your customers are what keep you in business. However, a partnership with another brand or company will help you continue to grow and expand your reach.
Reach out to other small businesses whose products and services would appeal to your customer base. Would they like to collaborate on a new product? Maybe they can help introduce you to their customers or work out a cross-promotional deal, so you both benefit from the partnership. Offer commission for helpful favors and be willing to extend a helping hand if they need one, too.
If you have a big project in mind, consider forming a joint venture with another company or group of small businesses. Everyone can split costs to create a short film, build something or invest in a new product that everyone could market to their customers. Working together to create something amazing might be the push your business needs to overcome a plateau or stay afloat during tough times.
Avoiding Rookie Mistakes
This may be your first rodeo, but that doesn’t permit you to make rookie mistakes. Even a simple miscalculation can mess up your finances and leave you in the red. Therefore, it’s best to find someone who can help you along the way.
Look for a seasoned professional and ask them to be your mentor. They can give you more insight into financial decisions and share their experiences, so you don’t make the same mistakes they did. In the end, you may end up even more successful than them. Remember their kindness when some young lad asks you to mentor them someday.