Doing a Financial and Legal Assessment of Your New Business Idea
Now that the research on the potential market and costs for your proposed small business has been completed, you need to examine the financial and legal implications of going into business for yourself.
Finding the money needed to start a new business is almost always one of the most difficult hurdles a new owner faces. At this point in the process of analyzing your business idea, you should have examined both the costs of starting a business and the characteristics of your market.
The result of that analysis should be that you know how much it will cost and how much you can expect to earn. Assuming that the startup costs are more than you have on hand, and more than you'll be able to earn right out of the gate, the next step is to figure out whether you can raise the difference.
In addition, you'll need to assess your exposure to risk. How much legal liability will the business take on, and what can you do to minimize any potential downside costs? Employees, customers and vendors are important parts of your business operation; they can also be the source of future lawsuits and judgments against your business.
Financing Options for Your Startup Business
Commercial lenders tend to shy away from new small businesses because they believe the risks of failure are too high. Commercial lenders want to see a history of success and a solid credit record. Thus, a lot of small businesses that need to borrow funds to get started find themselves in a complicated situation: the banks won't lend them money unless they have a solid track record, but they can't build that record until they get the money.
What to do? One possible solution is to look to smaller lenders with good reputations for small business lending. Bank mergers and consolidations have forced some of the smaller banks to take some chances they perhaps wouldn't have taken before. Small businesses are often the beneficiaries of those changes. Each year, the Small Business Administration publishes a report that rates commercial banks on their small business lending performance. More detailed information can be found on the SBA web site.
Some banks will offer small business loans through the SBA. Ask your banker about SBA loans, but be aware that the SBA loan program is being squeezed from all sides. First, Congress is looking to reduce funding. Even if Congress is unsuccessful in reducing funding, current funding levels are not expected to grow in the coming years. Second, this funding stagnation comes at a time when loan requests from the SBA are at an all-time high because so many people are starting their own businesses, so there are fewer dollars to go around. Third, the SBA is under pressure to be more selective in who it loans money to because of recent high default rates. As a result, getting a loan from the SBA is becoming more difficult all the time.
Another solution chosen by many small business owners is to raise the money themselves, such as by taking out a second mortgage or by selling some of their possessions. Additional solutions include borrowing from family and friends and taking on partners and investors.
Other possible financial sources include venture capital firms that finance startups, debt capital, cash flow financing, asset-based financing, receivables financing, state economic development pools, and city and county funds.
For a complete discussion of the pros and cons of these choices, see getting financing for your business.
Legal Assessment of Your Startup Business
When making a legal assessment of your business idea, you need to determine to what extent the operation of your business might expose you to legal liability. Discuss the potential risks with your lawyer. If you don't have a lawyer, it's time to find one.
If all you want is an overview of the types of liabilities your business may be exposed to, ask your insurance agent rather than your lawyer. Your insurance agent will have a good idea of the overall picture and, unlike the visit to the lawyer, it's free.
Of course, this tip applies only to an overview of your liabilities. If you need legal advice (for example, if you need an assessment of the odds that a suit will be filed against you), consult your lawyer.
Once you determine the risks, there are steps you can take to protect yourself. One way is by purchasing insurance. For a complete discussion of how to purchase business insurance to protect yourself adequately, see the business insurance discussion.
Another way to protect yourself is by incorporating your business so that the risks will be borne by the company and not by you. Corporations may not be for everyone because they can be expensive to create ($400-$500 if you do it yourself vs. $1,000-$5,000 if a lawyer does it for you) and a lot of trouble to maintain. You could also decide to form a limited liability company to achieve the same protections.
Finally, one of the best ways to protect you and your business is to create a comprehensive asset protection plan, which would include elements of insurance and limited liability, as well as other techniques designed to preserve wealth in the face of creditors.
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