Every week I meet with hopeful entrepreneurs who have an idea to start a business, and come to me seeking funding through the SBA Microloan Program that I manage. Lately I have been noticing some trends with many of our potential borrowers. They are not ready to start a business because they have not taken care of 3 important things yet.
1. Personal Finances are a Mess – If you are in debt up to your eyeballs, barely keeping up with minimum payments, and your credit score is in the dumps, then you are not ready to start a business yet. Your personal finances will determine your ability to secure a loan for your business in the future. If you anticipate needing a loan for the business at some point, but your personal finances are already a mess, get that taken care of first, otherwise you won’t be able to secure financing, and may lose your business altogether. You don’t need a perfect credit score or a net worth in the millions, but if you are barely holding on now, how are you going to make it through the first few years of startup a business?
2. No Market Potential Research – Does anyone actually want your product or service? I pound this into my clients time and time again. Before you start a business, take 5 minutes and use the Google Adwords Keyword Tool to determine how many people are searching for keyword phrases related to your product or service each month. For example, maybe you are going to build a web app where a user answers a number of questions and then the tool automatically tells them the kind of dog that is most compatible for their family. Before you hire software engineers, and web designers, you should find out how many times people search on Google for keywords like:
- Good dogs for people with allergies
- Cheap hypo allergenic dogs
- Dogs that don’t shed
You will probably find that these keyword phrases get hundreds of thousands of searches each month. That is great, but is there competition? Sometimes it might be better to compete in a market with no competition and 1,000 monthly searches versus a highly competitive niche with 100,000 monthly searches. Either way you need to do the research.
3. No Cash Flow Projections – Finally, you need to create some financial projections for your proposed startup. Many business owners just get started and then realize that they are going to need $50,000 to fulfill orders. The only problem is that they are only a couple months into the business at that point and no bank is going to lend them 50 grand so early in the business. If you would have worked through some cash flow projections and different scenarios before you started the business you could have worked to line of financing from friends and family in the event that you need some additional cash. It is not a good idea to go to friends and family for money last minute. You should warm them up to the idea, let them watch the business grow and succeed, and then ask for them to partner with you.
Until you take care of these 3 things, you really have no business starting a business. You are setting yourself up for failure, a failure that could be avoided if only you took the time to get these 3 important aspects of your business taken care of first.