Starting a Small Business
Starting The Business

Now that you have computed your initial capital requirements, where will you get the money? The first source is your personal savings. Then relatives, friends, or other individuals may be found who are willing to "venture" their savings in your business. Before obtaining too large a share of money from outside sources, remember you should have personal control of enough to assure yourself ownership.

Once you can show that you have carefully worked out your financial requirements and can demonstrate experience and integrity, a lending institution may be willing to finance part of your operating needs. This may be done on a short term basis of from 60 days to as much as one year. Any institution that has money to lend is primarily concerned with security. The security may be a business asset, but when you're just starting the best security is usually your home or some other personal asset.

The second thing the lender will want to see is some sort of business plan. If you complete a business plan - which includes a cash flow forecast - the lender will see that you have done some serious and realistic thinking about your business and be more likely to consider your request.

Become acquainted with your banker. In selecting a banker consider progressiveness, attitude toward your business, credit services offered, and the size and management policies of the bank. Is the bank progressive? The physical appearance of the bank may give you some indication. When the employees are reasonably young, interested in your problems and active in civic affairs the bank is likely to be progressive. The character of the bank's advertising may also be a clue to its progressiveness.

To be effective the banker should be interested in helping you to become a better manager, and build a continuing relationship that will mean profitable business for you and the bank over the years.

Will the bank offer you the kind of credit you need? For example, if seasonal accumulations of inventory become a problem will the bank make a loan against public or field warehouse receipts? If your capital is tied up in accounts receivable during your heavy selling season, will the bank take these receivables as security for a loan? Will the bank consider a term loan?

Finally, know the size and management policies of the bank. Will your maximum requirements fall well within the bank's "legal limit"? If you plan to do some export business, does it have a foreign exchange department? If you or your dealers sell on installment terms does the bank have facilities for handling installment paper? How deeply is the bank concerned with the growth and prosperity of your local community?

When you deal with your banker, sell yourself. Whether or not you need a bank loan, make it a practice to visit your banker at least once a year. Openly discuss your plans and difficulties. It is the bank's business not to betray a confidence. If you need financial assistance carefully prepare, in written form, complete information that will present a thorough understanding of your entire proposition. Many business-people or prospective business operators destroy their chances of obtaining financial help by failing to present their proposition properly. Remember, before a banker will make a loan he/she must have satisfactory answers to questions such as these:

1. What sort of person are you?

2. What will you do with the money?

3. When and how do you plan to pay it back?

4. Does the amount requested allow for unexpected developments?

5. What is the outlook for you, for your line of business, and for business in general?

Trade creditor or equipment manufacturer, Companies from which you buy equipment or merchandise may also furnish capital to you in the form of extended credit. Manufacturers of store fixtures, cash registers, and industrial machinery frequently have financing plans under which you may buy on an installment basis and pay out of future income. You need not pay for the goods at once. If goods are for resale, no security other than repossession rights of the unsold goods is involved. However, too extended a use of credit may prove expensive. Usually cash discounts are quoted if a bill is paid within 10, 30, or 60 days. For example, a term of sale quoted as "2-10; net 30 days" means that a cash discount of 2 percent will be granted if the bill is paid within 10 days. If not paid in 10 days, the entire amount is due in 30 days. If you do not take advantage of the cash discount, you are paying 2 percent to use money for 20 days, or 36 percent per year. This is high interest. Avoid it.

Now that you have decided what business to start and about how much capital will be required, you may find it necessary to join with one or more associates to launch the enterprise.

Partnership

If you lack certain technical or management skills which are of major importance to your chosen business a partner with these skills may prove a most satisfactory way to cover the deficiency. If you are very skilled in your special area but lack management training and skills, you might look for a partner with a background in management. If you may need more start-up money, sharing the ownership of the business is one way to obtain it. Great care should be taken in deciding upon a partner. Personality and character, as well as ability to render technical or financial assistance, affect the success of a partnership.

A partnership can be a mixed blessing. A partner who puts in time or money has a right to expect a share in running the business.

In a partnership the liability for the debts of the firm is unlimited, just as it is in a single proprietorship. This means the owners are personally responsible for the firm's debts, even in excess of the amount they have invested in the business. In a corporation the liability of the owner is limited to the amount they pay for their shares of stock. A partnership, like a single proprietorship, lacks continuity. This means the business terminates upon the death of the owner or a partner, or upon the withdrawal of a partner.

Corporation

The corporation is a legal entity whose continuity is unaffected by death or transfer of stock shares by any or all of its owners. Even with no partners, you may decide a corporation with minor stockholders is better than a single proprietorship primarily because of the corporation's limited liability.

Once you have decided what type of business you want to start and the investment requirements, you are ready to select a location. The number of competitive businesses already in the area should influence your choice of location. Some areas are overloaded with service stations or certain types of restaurants. Check on the number of your kind of business in Census figures, the yellow pages, or by personally checking out the location.

Factors other than the potential market, availability of employees and number of competitive businesses must be considered in selecting a location. For instance, how adequate are utilities - sewer, water, power, gas? Parking facilities? Police and fire protection? What about housing and environmental factors such as schools, cultural and community activities for employees? What is the average cost of the location in taxes and rents? Check on zoning regulations. Evaluate the enterprise of the local business-people, the aggressiveness of civic organizations. In short, what is the town spirit? Such factors should give you a clue to the city or town's future.

Chambers of Commerce and nearby universities usually have made or are familiar with local surveys which can provide answers to these questions and the many other questions which will occur to you.

Next you must decide in what part of town to locate. If the town is very small and you are establishing a retail or service business, there will probably be little choice. Only one shopping area exists. Cities have outlying shopping centers in addition to the central shopping area, and stores spring up along principal thoroughfares and neighborhood streets.

Consider the shopping center. It is different from other locations. The shopping center building is pre-planned as a merchandising unit. The site has been deliberately selected by a developer. On-site parking is a common feature. Customers may drive in, park and do their shopping in relative safety and speed. Some centers provide weather protection. Such conveniences make the shopping center an advantageous location.

There are also some limitations you should know about. As a tenant, you become part of a merchant team and must pay your pro rata share of the budget. You must keep store hours, light your windows, and place your signs according to established rules. Many communities have restrictions on signs and the center management may have further limitations. Moreover, if you are considering a shopping center for your first store you may have an additional problem. Developers and owners of shopping centers look for successful retailers.

The kind and variety of merchandise you carry helps determine the type of shopping area you choose. For example, clothing stores, jewelry stores and department stores are more likely to be

successful in shopping districts. On the other hand, grocery stores, drug stores, filling stations, and bakeries usually do better on principal thoroughfares and neighborhood streets outside the shopping districts. Some kinds of stores customarily pay a low rent per square foot, while others pay a high rent. In the "low" category are furniture, grocery and hardware stores. In the "high" are cigar, drug, women's furnishings, and department stores. There is no hard and fast rule, but it is helpful to observe in what type of area a store like yours most often appears to flourish.

After determining an area best suited to your type of business, obtain as many facts as you can about it. Check the competition. How many similar businesses are located nearby? What does their sales volume appear to be? If you are establishing a store or service trade, how far do people come to trade in the area? Are the traffic patterns favorable? If most of your customers will be local inhabitants, study the population trends of the area. Is population increasing, stationary or declining? Are the people native-born, mixed or chiefly foreign? Are new ethnic groups coming in? Are they predominantly laborers, clerks, executives or retired persons? Are they all ages or principally retired, middle aged, or young? Judge buying power by checking average home rental, average real estate taxes, number of telephones, number of automobiles and, if the figure is available, per capita income. Larger shopping centers have this type of information available, and will make it available to serious potential tenants.

Zoning ordinances, parking availability, transportation facilities and natural barriers - such as hills and bridges - are all important considerations in locating any kinds of business. Possible sources for this information are Chambers of Commerce, trade associations, real estate companies, local newspapers, banks, city officials, local merchants and personal observation. If the Bureau of the Census has developed census tract information for the particular area in which you are interested you will find this especially helpful. A census tract is a small, permanently established, geographical area within a large city and its environs. The Census Bureau provides population and housing characteristics for each tract. This information can be valuable in measuring your market or service potential.

Choosing the actual site within an area may well be taking what you can get. Not too many buildings or plants will be suitable and at the same time, available. If you do have a choice, be sure to weigh the possibilities carefully.