If starting your own business is looming on the horizon, you'd be joining millions of other Americans elevating the number of new businesses in the U.S. to decade highs.
But before you take the leap, remember that being an entrepreneur requires a lot of preparation: You need to consider start-up costs, learn how to properly navigate your finances and figure out the operating costs involved in the day-to-day functioning. While there are no hard and fast rules, it's important you master some of these basics before embarking on this new journey.
Securing capital
If you want to grow your business and be successful, you need to secure the finances to run it properly. Cash flow is key for every small business if they hope to make payroll, pay suppliers and keep operating.
These six steps will set your course for successfully securing business capital.
1. Know your options. The way entrepreneurs secure capital has changed dramatically over the last decade, from traditional bank loans to crowdfunding, instant online loans, online lending platforms, angel investments and more. Before you make a funding selection, however, it's critical to be aware of all your options.
2. Instill proper accounting procedures. The first step to securing financing is proper accounting, says Chris Ward, small business credit executive at Bank of America. "How do you express that your business is successful? It's by having good accounting to track your financial performance, profit and losses, as well as cash flow." Solid and transparent accounting discloses your business' backstory to would-be lenders, and when thorough and well presented, it strengthens your case for funding.
3. Create a professional-quality business plan. Ward recommends having a professional-quality business plan in digital format that covers essential business information, such as your value proposition, customer base and market strategy.
4. Understand the 5 C's of credit. Improve your chances for a loan by understanding the 5 C's of credit, says Ward. These are capacity, collateral, capital, conditions and character. Capacity refers to your cash flow and debt-service coverage ratio, a measure of your business' operating income divided by its debt obligations.
"Banks underwrite cash flow," says Ward. Collateral refers to those assets a bank can use to offer you a secured loan, such as real estate or other business assets. Then consider how much capital you have. "Are your assets worth more than your liabilities?" asks Ward. Fourth, know your market conditions, such as the overall macroeconomic climate in which you're operating (which at present is strong for many industries), as well as the microeconomic factors that might impact your particular niche. Finally, your character matters. "Whats your credit score? What's your training, skills and reputation as an entrepreneur?"
5. Understand the loan terms. Make absolutely certain you understand the terms of any loans or funding you accept. What's the interest rate? How much equity are you giving up? Are there any constraints upon how you operate your business?
6. Keep meticulous track of your expenses and revenues. Successful businesses achieve real growth in part through good cost management. Keeping good accounting records can help you best plan for your business' needs.
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Don't limit yourself to free tools. You can maximize use of free tools when available and appropriate — everything from free payments apps to online marketing tools — to help you cut costs and grow without assuming much debt. On the other hand, don't limit yourself to free tools if you actually need something more.
Don't try to do it all yourself. Underinvesting in your business is another big no-no. The good accounting records you've been keeping can help you understand how much you have to spend and where you need it most. This means not trying to do it all yourself. Seek advice. Hire the right people. Trying to do it all yourself, or underinvesting in your business' critical needs, can be a recipe for slow growth.
Don't be afraid of marketing. That means knowing the right marketing mix for your business, which may include some mix of traditional advertising and social media, or online marketing. If you're unfamiliar with any of these, or unsure how they may impact your business growth, take a look at your competitors. What are they using to market themselves? Are they succeeding? And have you carefully considered your marketing strategy and its impact within your business plan?
Network, network, network. no matter how busy and immersed you are in your own business, don't put off networking opportunities. Not only is it a means to meet individuals who can help your start-up, but it also helps you gather competitive intelligence and makes you a more recognizable face in your community. The best business owners are evangelists for their brands, and the very best do so for their respective industry. Seek out events in your hometown, and join the small business conversation.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
