Lowering the Risk of Starting a Business

Posted on October 13, 2009 by David Gass 4 Comments

I recently received an email from a staff writer at a national business magazine asking for response to one of their readers questions. The reader stated that they had lost their job, been unemployed for the last six months and is now looking at setting up his own business. He wanted to know if it was a good idea to cash out his retirement account and use that money to get the business started. He had only six weeks left of savings for his living expenses and couldn’t get a job in his field, so he thought it was best to just set up his own company.

Let me start by saying that I don’t believe building a business with the foundation set on sand is a good idea. If you don’t have a concrete foundation before you start the company odds are you won’t have a long lasting one. The solid foundation starts with having enough working capital to get the business through the start-up phase without having to take much out of the business for living expenses. When I started Business Credit Services, I didn’t take a paycheck from the company for two and half years. I was able to do that because of another source of income. That source of income was solid and allowed me to make decisions for the business that were strategic and looked to future growth, not just based on how do I make money today, which can be short term thinking.

That being said, businesses have started with shaky ground and made it. The point is to lower your risk of failure. I believe we would all agree that if we can lower our risk by making decisions up front we would.

Here are a couple of ways to lower your risk when starting a business.

#1 – Have a written plan. The SBA recently did a study of start-up businesses over a five year period. They found that those who wrote a plan for the company were seven times more likely to succeed long term than those who wrote nothing.
A written plan can be a professional business plan, but doesn’t need to be to that level. You can simply take the time to write up financial projections for three years, competitive analysis in your industry and a marketing plan and you’ll be way ahead of most entrepreneurs.

#2 – Incorporate. Those who form a corporation or LLC are developing a legal structure for their business and are planning for the long term. In addition there are many benefits for setting up a corporate structure including tax, asset protection and credibility.

#3 – Build business credit. Have a business credit profile and score built on your business so you don’t always have to rely on your personal credit. You can leverage the use of a corporate structure and obtain credit and financing without having any of that show on your personal credit report, giving you the ability to keep your personal credit separate.

#4 – Think revenue. Start each day by thinking about how you can create revenue for the business and do that first. Too often entrepreneurs think of everything other than the revenue and the other stuff doesn’t pay the bills.

#5 – Develop your team. Have a solid team of people around you to support you in the business. You don’t have to hire employees or even pay for the team. The team can include a supportive spouse or family member. You also need to include an expert in your field and in entrepreneurship.

#6 – Positive mindset. Keep a positive mindset by surrounding yourself with quality individuals who don’t bring you down every time you talk to them. Get rid of the naysayers and turn off the news. News these days stands for: Nothing Except Worthless Sh*#

#7 – USP. Write out your unique selling proposition and stick to it. The unique selling proposition is what makes you so unique from your competition that people will buy from you instead.

#8 – Have sufficient working capital. If you think you need $100,000 to start your company double that number and add 20% and you’re more likely to have the right numbers.

#9 – Bootstrap. You don’t always need to start with $100,000. I started Business Credit Services with just $200. We built the business from the revenue generated in the company and didn’t have unnecessary expenses. I knew a business a few years back who started to compete directly against us just a few miles away. They spent over $250,000 to set-up their offices and hire staff. They closed their doors six months later. There is something to be said for creating a good image but it’s better to have your doors remain open.

#10 – Passion. Have the passion to grow the business. Ask yourself “Is this something I want to do for the next 20 years”. Regardless if you want to be around 20 years or not you need to treat the business as if you were going to be doing it for 20 years. The hours most start-up entrepreneurs work could likely be equivalent to 20 years of an average worker, just in the first 3 years anyway. So you better be passionate about what you are doing.