The Basics of Starting a Small Business

There's more to starting a small business than selling goods or services. Here's a discussion of some of the complications you'll have to navigate.

| March/April 1983

  • starting a small business - illustration of business loan application and stacks of cash
    Thinking of starting a small business? Unless you're using your own money, you'll need to obtain financing.
    Photo by Fotolia/mangostock

  • starting a small business - illustration of business loan application and stacks of cash

For many people, an important part of living the American Dream involves having the chance to take a stab at being one's own boss by picking up on an idea and turning it into a profitable reality. And now, when a lot of folks are actively seeking career changes (by choice or necessity), it may just be the ideal time to test the entrepreneurial waters by starting a small business.

Unfortunately, the statistics regarding annual new business start-ups and failures can be alarming. It seems that roughly eight of every ten new ventures fail within five years. But there's no reason why yours can't be one of the 20% that survive and prosper! To help insure that'll happen, however, it's a good idea to study some of the available literature on the subject, and to consult with as many professionals as possible.

No business activity should, for example, be undertaken without the advice of lawyers and accountants, and a smart entrepreneur will also enlist the aid of the nearest field office of the Small Business Administration (SBA), the only federal government agency specifically set up to assist the potential (or practicing) small-business person.

Get Organized

First of all, you need to establish a business plan that outlines [a] your objectives, [b] your potential market, [c] your plan for reaching that market, and [d] your method of operating the business. Before you take even the first step toward locating financial backers, you should have those items thought out and the answers presented in writing. After all, no investor can be expected to take an interest in sponsoring your venture if you haven't shown enough interest in it yourself to set down a detailed plan of action.

However, once you've established your course — and assuming that you yourself don't have the capital necessary to implement your program — the next step is to locate financing. Your first stop should be the office of the nearest commercial banker. You see, although you might not succeed at getting a business loan from that institution, banking personnel — who generally have a wealth of contacts in the community — may be able to both advise you of and point you toward potential private investors in your area.

There's yet another advantage to be gained by seeking help at a bank: Once you've been turned down by at least one commercial lender, you see, you can contact the Small Business Administration for assistance in locating funds. In fact, the SBA itself can guarantee loans up to $500,000, at an interest rate not more than 2.75% over prime. Since the money involved is still bank money, though, it's wise to keep in mind that most lending institutions will expect you to produce $1.50 worth of collateral for every $1.00 you seek to borrow.

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