These days, maintaining multiple streams of income is fast becoming the status quo, not only as an earning booster, but also as a hedge of sorts in case one source of income dries up. Though many investors may recognize the need to hedge against a loss by spreading out the investments in their portfolio, if they are planning to bolster their income with a side business that same attitude often inexplicably falls away. While some business ideas may require little overhead, and thus entail low risk, the stakes get higher when the business requires a significant personal investment of money, time (which is also money), and effort.
While it may not be so pleasant to think about the failure of your venture before you’ve even gotten it off the ground, the truth is that year after year numerous small businesses of different flavors don’t succeed. According to the Small Business Association, only about 50% of new small businesses will make it past five years.
So if you are one of those looking to increase your self-worth by pursuing a business, then you owe it to yourself and your assets to exercise some due diligence. Here are three things to consider before making any kind of investment in a new business idea:
The Importance of Having a Business Plan
Even if you are thinking of starting a low overhead business, such as working from home as a professional contractor or consultant, it pays to think things through before delving into the initiative. Although in such a case you may not need to formally write out a business plan document, the process of knowing what you want to do and what resources you will need to do it cannot be emphasized enough. It also goes without saying that where your investment in the business will be considerable, than conducting some market research, taking time to develop your product or service, and having a solid business plan in place is a must.
Most business plans include information about your product or service, your intended market, the industry, how much money you will need to get your operation up and running, the structure of your business, as well as a breakdown of some of the risks involved and how you plan on minimizing them (such as enrolling in a liability insurance plan). In other words, it is meant to be a comprehensive study of the viability and profitability of your venture that not only can it help to illuminate any unseen opportunities, but may also help you to recognize some potential pitfalls
If you are unsure how to go about writing up a business plan, you can get free assistance from organizations, such as SCORE, the Small Business Association (SBA), or your local small business development center.
Bring Experienced Consultants on Board
Depending on the type of business you want to start, it may be appropriate to pay for the professional assistance and advice of a qualified accountant, lawyer, or business consultant. This person can help you make important decisions regarding your business structure, taxes, accounting systems, IT setup, and other legal-type issues that you may not be aware of.
If this is your first foray into entrepreneurship, you should also consider seeking out a mentor- whether formally via organizations, such as SCORE, the SBA, or Micromentor.org, or informally within your network of trusted friends, family, or other acquaintances who may have run their own businesses or have some valuable industry-specific knowledge. A good mentor can not only be a support when the start-up process gets rough or unclear, but he or she can also help to pinpoint any pitfalls in your plan and help you to avoid many of the common traps that new entrepreneurs often fall into.
Understand the Risk to Your Personal Assets and Credit
If you plan on tapping your personal assets to fund your new business, then it is imperative that you understand the inherent costs and risks of doing so. Taking out a home equity loan (if you can even get one these days), using a personal line of credit, or asking a friend or family member for a loan, may all be a relatively quick source of cash. But you have to be sure that you can comfortably afford to spend that money with little or nothing in return. If you plan on using cash savings, then don’t forget to also factor in the “cost” of any potential interest that may have been generated on it.
Moreover, different business structures carry different levels of liability for their owners. If you are thinking of starting a sole proprietorship or a partnership, then you need to be aware of the affects a business failure may have on your personal financial liability as well as on your credit profile. In such a case, you should make every effort to separate your personal credit profile from your business activities.
This typically means having separate bank accounts, separate credit cards (just make sure to read the fine print and get a business credit card does not report to your personal credit profile), and a separate credit rating. Without these safe guards in place, then should your business fail leaving you with outstanding debt, it can adversely affect your debt-to-income ratio and thus lower your personal credit rating.
In short, starting a business carries an element of risk. If you are considering the entrepreneurial route as a way to generate additional income, then make sure the level of risk involved is something you can truly handle.
Gary Barzel is the manager of business development for Fastupfront. Fastupfront offers small business loan alternatives for existing businesses in need of working capital.