According to often published statistics, more than 80 percent of small businesses fail. On the surface, this is lamentable and common scapegoats for small business failure are often “the economy” or “systemic disadvantages for small businesses” or “lack of access to capital”. However, the causes for business failure are quite often preventable through sound practices, and never underestimate the power of the mindset of the business owner as a major factor.
Mindset is of vital importance, and the following indicate the mindset of the unsuccessful. If you believe any of the below, don’t launch a business.
1. I should receive free money or loans for my business because I am a veteran, minority, or woman. Grants are for nonprofit organizations. If you donate to a nonprofit, you will receive a tax benefit. There is no tax benefit for contributing to a for-profit business, so there is no incentive for someone to provide money to small business owners that is not a loan or purchase of a share of the business.
The government does not provide grants to for-profit small businesses at this time simply because they are owned or operated by veterans, minorities or women. Nor will it make a difference if you happen to be all three. Taxpayers show little appetite to directly fund startups, although there are publicly supported agencies and organizations that offer technical assistance and training for small business owners at low or no cost.
Additionally, banks lend to businesses owned and operated by minorities, women or veterans using the same criteria as they lend to businesses that are not. That criteria is solid credit and operating history as well as sufficient collateral. There are however organizations that specialize in arranging credit for underserved populations.
Please note that there ARE federal grants available through the Small Business Innovation and Research/Small Business Technology Transfer (SBIR/STTR) programs. SBIR/STTR is intended to assist small businesses that are engaged in vital technological, scientific, or medical research. Research and development are common uses of SBIR/STTR proceeds.
2. There is no way I will put my home or personal assets at risk for a business loan. Banks evaluate a loan using two simple criteria. Will this loan be repaid? If this loan is not repaid, what can we take? Startups have no credit history or revenue, and usually little or nothing valuable to offer as collateral. Generally speaking, if the business has operated for two or more years and has solid credit and revenue, it may or may not be able to obtain a loan. Otherwise, a personal guarantee from the business owners will be required.
Loans are just one of many ways to obtain financing for a business. With some creativity, you can find something within arm’s reach to work with, or even make clever use of credit cards to finance your business.
3. I will “1099” everyone who works for me so that I can save money by paying below minimum wage and not providing benefits. If the financial well-being of employees is of no concern, perhaps IRS penalties will be. If someone is improperly misclassified as an independent contractor (referred to as 1099 because of the tax reporting documentation issued to independent contractors) when they were treated as employees, the penalties can be substantial. In addition to back Social Security taxes, interest and penalties, back income taxes and penalties and interest, criminal penalties of up to one year in prison are possible if the misclassification was intentional.
The complete rules are available in IRS Publication 15-A, but in general, there are two distinctions. If an employer has behavioral control and financial control, the person employed must be classified as an employee. Behavioral control means that the employer has the right to control how the work is done for which the work was hired. If you are telling them what time to show up, when to go to lunch, what to wear, and otherwise controlling their day, you have behavioral control. They are employees. Financial control means that the employer can control the financial aspects of the worker’s job. If the worker is not reimbursed for expenses, must cover costs for his equipment, stands a substantial risk for economic loss, and is paid a flat fee, that worker may be an independent contractor.
4. I expect the business to generate a lot of passive income for me. Sales pros sell a dream on late night infomercials and social media. You travel the world or live on a beach while cash tumbles in from your business, with little effort required on your part. For several thousand dollars, they will show you how. Save your money.
While it is certainly true that you can create a quality business that earns revenue 24/7, it takes time and a great deal of trial-and-error to create such a business. If your only motivation is generating income without working for it, you can buy lottery tickets. If you are wealthy enough that you can live off income from stocks and bonds, more power to you. Absentee business ownership is a great way to get scammed.
Yes, you could buy an existing business. You could plan the business now, keeping the eventual exit in mind. For now, what is your plan to market your business? What is your plan to hire and keep great people? What equipment will you need?
Give it serious thought.
This article was written after countless hours of consultations with aspiring business owners. Most people have the right motivations and just need specialized help.
Others have unrealistic expectations of customers, employees, the government, and the market. They may or may not adjust. Many can’t. Such people often enter the business world with a light heart and a heavy wallet, and exit the business world with a heavy heart and a light wallet.
Save money and pain by planning. Plan to solve a problem for people. The greater the problem you solve, the greater the rewards. Don’t look for loans or chase money before you have solved this problem in a compelling way.
Go forth and prosper.