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Words of advice from small business owners on start-ups
Thinking about starting your own business?
Here's some advice from people who have made the leap.
Even if you already know what you want to do, even if you have identified your market, made up a detailed business plan, studied the Small Business Administration Web site, pored over guidebooks, lined up the money - well, some money - and figured your best job right now in this lousy economy is one you create, you are probably overlooking something important.
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You need any edge you can find.
In that spirit, here is financial advice from people who have recently started their own businesses. Included are bits of wisdom they wish they had known when they started out.
Take it slow, be ready for tight times
Anne Heap left an advertising job to bake pretty cakes. She started Pink Cake Box in 2005 in New Jersey, offering specialty cakes, cupcakes and cookies baked in borrowed kitchen space in a restaurant and, later, her mother's house. "The low overhead was big, big, big," she said.
Only when her business started to grow in 2007 did she really extend herself financially to open a shop in Denville, N.J. Heap says the initial time building her business on a shoestring set her up to be successful later. In baker-speak, she gave her business ample time to rise.
Experts say that strategy is sound, especially since profits can be slow to come. Robert Spiegel notes in "The Complete Guide to Home Business" that newbies should be prepared to be without a paycheck for six to 18 months.
"Patience is definitely a virtue," Heap said. "If you start a business and you think you're going to be profitable even in the next year, you're not being realistic. There's so much involved in getting the business to where you need it to be."
Make sure you have health insurance
lined up
Health insurance is the tail that wags the dog for many would-be business owners, the big expense that discourages them from giving up the security of a salary job.
Many entrepreneurs are fortunate to be married to someone with family coverage, and those 65 and over may be eligible for Medicare. For many others, the best option is COBRA (Consolidated Omnibus Budget Reconciliation Act). Under COBRA, if you leave your old salary job on good terms you could be eligible for up to 18 months coverage under your former employer's group plan. The catch: You pay your old share plus your employer's contribution.
This is what happened to Tim Herman of St. Paul, Minn., when he started Small Business Connections, which helps other businesses find the right professional experts to help them grow. He went from paying $660 a month to insure his family of four at his old job to $1,007 when he had to pick up the whole cost.
"It was scary," he said. "How were we going to continue our health coverage?"
Herman worked with an insurance agent to craft a new plan with a higher deductible and a "health savings account" to get the cost down to a more manageable $550 a month.
Another option is to shop around for health insurance price quotes. One popular site, ehealthinsurance.com, allows you to search by zip code.
Calculate how much money you will need, then add more
You think you know how much money you will need for your business, but you don't.
Add some cushion in your finance plan to cover what the Pentagon used to call "unknown unknowns" - maybe that new laptop you'll need to handle all your financial programs, or the legal service fee you never saw coming.
John Norris and his girlfriend decided a couple of years ago to revive her old designer clothing label, "Jackie Loves John." They had savings, they took out equity on their homes, and they were granted an ample line of credit to pay for rental space in Troy, N.Y., machines, fabric and vendors.
And still they were stretched thin by X factors, even something as basic as ordering fabric from France. They didn't count on extra, unadvertised costs for shipping.
"There are so many things that sneak up on you," Norris said. "A freight forwarding fee?"
Multiply that by a factor of dozens and you get a sense of how costly a business can be.
Herman suggests applying for more financing than you think you will need because there's no guarantee a loan officer will say "yes" when you come back a second time.
"Absolutely, if you're going to get a bank loan, always, always, always ask for way more than you think you'll need," he said.
Are you a person or a corporation?
Picking a legal structure for the new business is an early choice with financial ramifications.
Many solo entrepreneurs keep it simple and choose a sole proprietorship. You still file a personal income tax statement, though with extra paperwork. But there can be tax advantages to incorporating, and the move can protect your personal assets if there is a claim against the business. Many owners form S corporations or limited liability companies, or LLCs.
Andrew Campbell of New Brunswick, N.J., went with sole proprietorship when he started Ace Computer Services in 2007. It made sense since he worked by himself after his full-time job. It was easier, he said, "but I can switch over at any time."
Anne Landgraf took a different route. After more than two decades in the composition business, Landgraf started Brooklyn BookWorks in her living room near Ann Arbor, Mich. She works with university presses and self publishers. She's a one-person business, but she wanted the protection provided by an LLC.
"I did it more out of fear. It limits any litigation so that your personal assets can't be gotten at," she said. "You don't think of people making books as being kooky, but sometimes they are."
Some experts suggest hiring a lawyer to draw up legal papers. Landgraf saved money by going to a Web-based legal document service, legalzoom.com, which advertises LLC fees from $149 to $359.
Different structures work for different people. There are plenty of places on the Web and in the library to read up on the pros and cons. A complete rundown is included in the guide "Start Your Own Business" by Rieva Lesonsky and the staff of Entrepreneur Magazine.
Do waht you love, love what you do
Lastly, if you plan to start a business, make sure you do something you're good at and wouldn't mind devoting a huge chunk of your waking hours to. This isn't financial advice per se, but your happiness at your work is directly related to its success. Heap likes to bake. Landgraf likes books. Campbell likes technology, and -- this is important too - he gets a buzz from being in business.
"I found the building of the business just as exciting as the work itself," he said. "It's energizing."
