Owning a small business in Nevada can be extremely rewarding, but the stakes are high. Only half of all new businesses survive five years or more, and about one-third survive 10 years or more, according to the U.S. Small Business Administration. Often entrepreneurs go into business with a good idea and a sharp focus on pursuing a passion but can overlook some key business needs and encounter avoidable pitfalls. There needs to be a clear idea of how the business will succeed.
It’s important, when considering starting or buying a business, to ask five important questions and have answers to each one:
How much time will running this business take? Often, potential small business owners underestimate the amount of time and energy it takes to launch a new business. In recent years, many people have considered starting their own business after being laid off or as a way to generate additional income. But launching a new business is not an endeavor to jump into lightly. And the time needed to research, plan, market and operate a business may be more than expected. It’s important to know how much time an owner has available to invest in a small business to make it successful. Make sure to allow time to strategize and market the business, not just run it.
Has there been enough research to achieve success? Whether buying a franchise or starting a business, an individual must do their homework. Develop a business plan with a clear vision and objective on how to obtain company goals. What’s the product or service that will be sold? Who’s going to buy it? How will the business receive payment? How will the idea fill an unmet need in the marketplace? Who’s the competition? Be as specific as possible.
Seek out guidance from peers and organizations that provide help to start-ups. There are many resources available to small business owners, such as SCORE, the U.S. Small Business Administration, and the National Federation of Independent Business. In Nevada, organizations such as the Nevada Small Business Development Center (Nevada SBDC) can help provide advice and guidance to small business owners. Additionally, put together a team of trusted advisors, including an attorney, an accountant, a banker and a financial advisor. Make sure to take advantage of available resources before launching a business.
How long will it take to make a profit? Most small businesses do not turn a profit immediately; business owners need to make sure there are enough reserves on hand to cover expenses. Every business is different, so there’s no general rule about when a business may become profitable. Many small businesses don’t make a profit for years. Experts recommend having enough working capital on hand to cover payroll, operations and other unplanned expenses for at least a year.
How should the product be priced so it’s competitive? One mistake many entrepreneurs make is pricing their product or service based on their perceived value of the commodity, rather than based on what the market will bear. Do the research and evaluate the competition. Determine the market price and figure out whether it’s possible to make a profit selling the products or services at that price. Winning the price war is not always better – make sure the business can generate sufficient profit margins.
What is affordable? Starting any business or buying into a franchise requires an individual to make a large initial investment, so it’s important to ensure that current and future finances are in order. Ask how much money is sustainable to lose? How much can be invested? And how can financing be raised if necessary? Also, look at how much savings or additional income is available to live on while getting the business off the ground.
Research the startup costs for the business and develop a plan with a financial advisor to ensure that the needed funds are available. Before applying for credit, make sure to be in the best position to secure financing. A bank typically wants evidence of a strong credit history, collateral or a secondary source of repayment in case of default, a significant investment of personal capital, favorable business conditions and the capacity to repay the loan.
A solid banking history with a financial institution can boost overall creditworthiness. Sustained cash flow provides clear evidence of an individual’s ability to repay a loan. Try to demonstrate a consistent flow of funds over time. This creates a record that shows long-term stability. Whether it’s maintaining account balances, paying off cards at the end of each month or making regular payments on a credit line, each aspect of payment history has the power to strengthen a credit profile.
When launching a new venture, go forward with eyes wide open. Be sure to explore all of the resources available and seek the knowledge of experienced advisors and peers to help navigate through it. Building a successful business starts with asking the right questions.
Lester Romero is the Assistant Vice President of Small Business Banking for Wells Fargo Bank in Nevada.