While the pandemic certainly took its toll on the economy and small businesses that help drive it, in 2020, new entrepreneurs filed a record number of business applications. Many of these businesses were started out of necessity or passion (or both). Businesses that build a strong foundation – including a plan to access capital, develop a trusted professional network and create important corporate documentation from the onset – will be best positioned to not only launch their dream into a reality, but to grow their businesses.
Following are three essential pillars for business owners to successfully start and sustain their business.
1. Access to Capital
While it’s very common for small business owners to fund their ventures out of their own pockets (77%), approximately a third report using bank loans and nearly one sixth report tapping friends and family to help. Though the cost of getting started is dependent on many factors, including fixed costs (e.g., initial equipment, location and insurance), plus variable expenses (e.g., inventory, shipping and sales), research shows the median cost to launch a business is approximately $13,000. Many times, entrepreneurs are putting up the majority of this investment personally.
The need for operating capital is greater than just getting off the ground. Business owners must also be prepared with short-term capital to weather storms like economic downturns or legal battles. A recent survey by the Federal Reserve Banks found 17% of small businesses would have to close if they experienced a mere two-month loss of revenue. And given the recent crisis we have seen globally due to the pandemic, far too many otherwise successful businesses were not able to survive an extended shutdown. Thankfully, programs like the Paycheck Protection Program (PPP) and Accion Opportunity Fund’s (AOF) Small Business Relief Fund have helped businesses across the country stave off shutting down.
2. A Trusted Network
Before you launch, it’s a good idea to gather a trusted network of business owners and professionals that want you to succeed, and don’t mind helping out when you need it. Luz Urrutia, the CEO of the Accion Opportunity Fund said it best, “If entrepreneurs don’t have their own circle of trust, whether it’s family, friends, or others in the community doing what they’re doing, they have to build one.”
Getting involved in your community and tapping the networks of friends and other business owners are great ways to meet others who can serve as resources to you, such as lawyers and accountants. Finding the right professional can be time consuming, and when you are starting up a new venture, time is a luxury that is in short supply. But finding and using a trusted network can help you make more informed decisions and avoid costly mistakes.
3. Proper Documentation
Regardless of the way you start or fund your business, you will need to have a solid foundation of legal, tax and accounting documentation to help you successfully maintain it. Any investment in your company, whether you self-fund or take loans or sell equity, requires appropriate legal and financial documentation.
It might sound like a simple concept, but generally, the more sophisticated your investor, the more necessary it is to ensure the transaction is properly papered and accounted for. At the same time, when raising money through friends and family members, it is important to formalize the relationship with a promissory note or the sale of stock in your company. Don’t settle for a chance at bad blood when you can put it in writing and make it legal. Doing so does not have to be a complex process, and a good lawyer, accountant or other online resource can help to make it painless, even if it might cost a bit upfront.
Lastly, having your financial and legal house in order is more than just papering over loans. It is laying a solid corporate foundation. Items include:
- Organizing documents: Including formation documents, meeting minutes, current ownership, and necessary government filings
- Material contracts and intellectual property: Documenting key suppliers or customers, important and novel technology or intellectual property (e.g., patents, trademarks and trade secrets)
- Important financial information: Maintaining an up-to-date and accurate business plan, along with historical and projected financial data that will validate the success of your company and its potential
Whether your long-term goal is to land outside investors, protect your ideas or simply avoid potential disputes in your family business, tapping the right resources today will ensure you are prepared before the need arises.
Running and growing your business is a lot less painful when you take the time to lay a proper foundation, including having the right documentation and trusted experts in your corner. Don’t be intimidated if you are unsure where to start; remember to tap your own professional network to learn from others. It is always in your best interest to use any help available to get your business set up and on the right path.
Chas Rampenthal is the Head of Industry Relations for LegalZoom.com.