Start a Business from Home: Everything You Need to Know

November 26, 2019
Posted in: Uncategorized

 

According to the Small Business Administration (SBA), 50% of all small businesses are home-based.  Starting a business from home is an ideal way to build its foundation in a low overhead environment. Lower overhead positively affects cash flow, which is critical for a startup. Operating from home will also allow you to take advantage of certain home office tax deductions.

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Myths & Realities of Entrepreneurship

 
If you’re itching to start a home-based business but haven’t done so, there are some myths about entrepreneurship that may have discouraged you from taking the first step. On the other hand, some of the myths may have skewed the facts and encouraged you to strike out on your own.

Let’s clear up the misconceptions so that you can determine if entrepreneurship is really right for you. Here are some of the most common myths:
 

Myth #1: Entrepreneurs don’t have a personal life

While entrepreneurship does require hard work and commitment, you can have a personal life. Effectively managing your time is the key to having a balanced life. Establish a work schedule and to-do lists to stay on top of business tasks. Being organized in your business life will leave plenty of time for a personal life.
 

Myth #2: Entrepreneurs take lots of risks

It’s true that entrepreneurs do take risks but they don’t always take lots of risks or place themselves in high-risk situations. Starting your own business is a risk, but like most savvy entrepreneurs, you should plan on taking calculated risks. The key to managing risk is to not risk more than you can afford to lose or that will cause your business to go under.
 

Myth #3: Entrepreneurs are only motivated by money

While most entrepreneurs wouldn’t start a business if they didn’t expect it to make money, that’s not their only motivation. Work/life balance, seeing the impact of their work, and flexibility are primary motivators for entrepreneurs
 

Myth #4: Entrepreneurs raise money from venture capitalists

Some entrepreneurs do raise money from venture capitalists but personal savings, personal loans, credit cards, friends, and family far outweigh venture capitalists as a funding source
 

Myth #5: All entrepreneurs have great ideas

Lack of a unique idea has caused many a would-be entrepreneur to abandon his/her dream of business ownership. You don’t need to reinvent the wheel. You can always put your own spin on an existing idea. Just make sure you’re not infringing on another company’s intellectual property. With that being said, a great idea doesn’t guarantee success. You need to know how to effectively market your company.
 

Myth #6: Anyone can be an entrepreneur

In theory, anyone can be an entrepreneur but not everyone has what it takes to be a successful entrepreneur. It takes a certain mentality to run a successful company.
 

Myth #7: You need formal training and education to be an entrepreneur

A degree in business or entrepreneurship can definitely help in running a small business but it’s not necessary. In a CNBC survey of business owners, only a quarter of the respondents graduated from college. If you’ve yet to earn a bachelor’s degree, you can be in good company with visionaries like Mark Zuckerberg, Steve Jobs, and Bill Gates.
 

Myth #8: You have to be young to be an entrepreneur

When it comes to entrepreneurship, age shouldn’t be an excuse for not getting started. If you have the mentality and resources to start your own company, why not do it? It’s true that business ownership among millennials is on the rise, but not all successful entrepreneurs are young. The founders of Starbucks, Estee Lauder, Nissan, Nestle, Porsche, Bank of America, and IBM were in their 50’s and 60’s when they started their companies. 
 

Myth #9: Entrepreneurs don’t quit until they succeed

Unfortunately, the odds of business failure are greater than the odds of success. It’s not easy to run a business. So, there are occasions where an entrepreneur must accept failure, minimize the damage, and move on. It doesn’t mean you can’t dust yourself off, learn from your mistakes, and start another company.
 

Myth #10: Entrepreneurship is genetic

Entrepreneurship isn’t an inherited trait. If your parents are successful business owners, it doesn’t mean you’ll enjoy the same success in business. 

 

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Come Up With a Business Idea

 
Now that we’ve separated fact from fiction, do you still want to start a home-based business? If yes, have you decided on a product or service? Some entrepreneurs know they want to start a business, but have a hard time coming up with a business idea. 
 

What Are You Good At?

Identifying areas in which you excel is an ideal way to come up with a product/service to offer. Your previous professional roles can give you some insight into situations where you produced results and added value. Did you use any of the same skills to generate income outside of your regular job? 
 
What are your hobbies? In your hobbies, do you use certain skills that would be of value to prospective customers? Once you’ve identified your core skills, you should be able to think of business ideas that make the most of those skills. 
 

Who Will You Sell To? 

Once you’ve zeroed in on a business idea that has the potential to be profitable, you need to determine who’s most likely to be interested in your product/service. This requires defining your target market. Identifying this group at the outset can help you determine if there are enough potential customers for your product/service. 
 

Define Your Target Market

When defining your target market, you may be tempted to include everyone in it but you need to target a specific group to be successful. For example, if you’ll offer accounting services it’s best to focus on businesses of a certain size within a particular geographic area as opposed to all businesses in your city. 

Once your target market is defined, you must next perform market analysis to determine the size of that segment of the market to ensure there are enough potential customers. 

 

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Research Your Competition

 
Are there other accounting companies vying for the same target market as you? If so, what’s your advantage over these competitors? 

To easily compare your company’s features/benefits against your competition, use a competitor matrix. The matrix should illustrate how your service is different or better than other services that a potential client might consider.

Don’t incorrectly assume that you have no competition. All businesses have competition even if it’s not direct competition (competitor offers a similar solution). If potential customers are currently solving their problems with a completely different type of solution, the business has at least indirect competition. Your indirect competition could be accounting software.
 
Here are some tips for finding out how your company stacks up against the competition:
 

  • Call competitorsCall competitors and pose as a potential customer. Ask them what differentiates them from similar companies.

 

  • Google search Search for similar companies located in the area that you plan to serve. Visit their websites to see how the businesses operate and what their competitive advantage or unique value proposition (UVP) is. A UVP is a statement that describes the benefit of a company’s offer, how it solves customers’ needs, and what distinguishes the company from the competition. A company’s UVP often appears prominently in every marketing campaign and on the home page of its website.

 

What’s Your Unique Value Proposition?

 
After researching your competitors, you should have a good idea of how many companies are already serving your target market. To win over their customers, you need to stand out and offer more value or address an unmet need.  Use the information from your competitor research to come up with your own UVP. Determine how you can offer a better solution, a better price, or both. 

For example, you discover that all of the accounting companies in your proposed service area operate out of professional offices requiring clients to drive to them. You could use this to your advantage and offer to come to your clients and offer a lower rate because you operate from home and don’t have the overhead associated with a professional office.

Defining a UVP can help you penetrate your market and put your home-based business in the best position for success. Your UVP should take the following into consideration:

  • What your customers need and care about
  • What you do really well

 

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Test Your Idea

 
After you’ve defined your target market, researched competitors, and performed market analysis, it’s time to test your business idea for viability. Should your product/service fail to deliver your expected results, it’s better that you find out before investing a lot of money. 

Your market analysis showed you that the size of your target market was adequate for establishing a profitable business. Now, it’s time to test that theory. The best way to do that is to put your product/service in front of your target market and see how they receive it. Here are several ways to do that:
 

Offer Freebies

If you’re providing a service, offer your expertise to prospective clients on a “free trial” basis. This is a great way to build a portfolio or client list. If you’re offering a product, give out free samples to members of your target market.
 

Offer Your Product/Service on a Small Scale

Look for trade shows, festivals, and other events where your target market is likely to be in attendance. For products, you can sell items on the spot and gauge interest and solicit feedback. Feedback will help you determine if you’re onto something with your business idea. It’ll let you know if you misjudged either the market or the product itself. For a service, consider offering discounts to get prospective customers to try your service. 
 

Crowdfunding Isn’t Just for Funding

Crowdfunding websites can offer more than funding. You can gain valuable insight from would-be investors. Their comments and advice will let you know if your idea has merit.
 

Have a Focus Group

In a focus group, members of your target market use your product/service and provide feedback.  
 

Don’t Quit Your Day Job

If you’re currently employed, inquire about reducing your hours while you work on your business. Don’t quit altogether until your business has proven to be viable by generating enough income to meet your personal expenses. 
 

Use Social Media 

Find online groups whose members are likely to be interested in your product/service. Ask for their impressions of your offering. You can also get relevant social media influencers to introduce your company to their large number of followers.  

 

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After your business idea has passed the viability test, you must register your business and get the necessary licenses and/or permits to ensure that you’re operating legally. 
 

Choose a Legal Structure

Before deciding on one of the five options below, keep this in mind: the business structure you choose will affect everything from day-to-day operations, to taxation, to asset protection. The ideal structure will provide the right balance of liability protection and benefits. 

      • Sole Proprietorship – The sole proprietorship is the simplest and most straightforward business structure. It’s an ideal option for businesses owned by one person. If you’ll use a business name other than your legal name, registering a sole proprietorship generally involves completing a “doing business as” (DBA) form with your local governing authority. Sole proprietorships offer no personal liability protection. Income is reported on the owner’s personal tax return.

     

      • General Partnership – In a general partnership, all partners actively operate the business and equally assume responsibility for its debts and obligations. Partnerships offer no liability protection. The partnership itself isn’t taxed; instead, income is “passed through” to the partners who can report income as well as losses on their personal tax returns.  

     

      • Limited Partnership –In a limited partnership, there can be both general and limited partners. The general partners own and operate the business and assume responsibility for all obligations but the limited partners act as investors only; they don’t make decisions concerning the business and aren’t liable for any of the business’s obligations. Taxation is similar to general partnerships.

     

      • Corporations – The corporate business structure provides excellent asset protection for its owners/shareholders. Since a corporation is a separate entity from its owners, personal assets aren’t at risk in the event of a lawsuit. Both S corporations and C corporations provide similar asset protection for their owners but the S corporation is only taxed once.  

     

      • Limited Liability Company – A limited liability company (LLC) is a business structure that combines the best features of a partnership with the best features of a corporation. Owners aren’t held liable for the company’s debts so personal assets aren’t at risk. There’s only one level of federal tax to pay because the LLC’s income and losses are passed through to the owners and included on their personal tax returns.

     

 

Get Licenses & Permits

All businesses need some type of license or permit to operate legally. The following list should give you an idea of the types of licenses and permits that are most often required by federal and local governments. Because license and permit requirements vary from state to state and differ among industries, it’s not possible to provide an exhaustive list. You’ll need to contact your state and local governments for the specific requirements for your home-based business.
 

  • General business license – All business types, including home-based businesses, must obtain a city or county business license.
  • Home occupation permit If you’re planning to operate a business from your home, you may need to obtain a home occupation permit.
  • DBA license If you’ll operate your business under a name other than your legal name, your local government (often the county) may require you to register the “doing business as (DBA)” name.
  • Federal and State tax ID numbersAll business structures except sole proprietorships and single-member limited liability companies (LLCs) without employees must apply for a federal employer identification number (EIN). Your state may require that you also obtain a state tax ID number.
  • Sales tax permitYour state may require it if your business involves the selling of taxable goods or services and you’re required to collect sales tax from your customers.
  • Health department permit You’ll need a permit from your county’s health department if your business involves preparing and handling food.
  • Construction permit If you’ll make structural changes to your place of business, environmental protection regulations may require you to get approval. You may need to obtain a building or construction permit from your local agency.
  • Sign permit – If you’ll place signage outside of your home, some localities have sign ordinances that restrict the type of sign you can use (size, location, lighting) while some require that you obtain a permit before installing a sign. 
  • Occupational/professional licenses – Depending on the state, some professions or industries (i.e. medical care, childcare, tax preparation, auto repair, cosmetology, legal services) must obtain a special license in order to operate. 

 

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Open a Business Bank Account

 
Once you’ve registered your home-based business, you need to open a business bank account. This will help you separate your personal and business expenses. 
 

What’s the Best Type of Account?

 
Here are the options for business bank accounts along with the pros and cons of each type:

  1. Business Checking AccountPros: Can use debit cards or paper checks for business expenses. Generally, have no transaction limit. Con: Deposits don’t earn interest.
  2. Business Savings AccountPros: Deposits earn interest. Can be linked to checking account. Con: Often have transaction limits.
  3. Business Certificates of DepositPro: Deposits earn higher interest than traditional savings accounts. Con: Can’t withdraw money until the term has ended.

 

Choose the Right Bank

 
Before you open a bank account, consider the following factors to ensure the bank can accommodate your business’s needs without charging excessive fees:
 

  • Convenience – Are there branches nearby? Does the bank offer online banking?
  • Services – Does the bank offer small business loans and lines of credit? This may come in handy down the line. 
  • Fees – Inquire about ATM fees, monthly service fees, deposit fees, and transaction fees. 

 

What Documents Will You Need to Bring?

 
Depending on your business’s legal structure, there are documents you’ll need to provide when opening your business bank account. 
 

Sole Proprietorship

  • Social security number or EIN
  • Personal identification
  • Certificate of assumed name/DBA

 

Partnership

  • EIN
  • Personal identification
  • Business license
  • Certificate of assumed name/DBA
  • Partnership agreement
  • Organizing document filed with the state (for limited partnerships)

 

Limited Liability Company (LLC)

  • EIN
  • Personal identification
  • Business license
  • Certificate of assumed name/DBA
  • LLC operating agreement
  • Articles of organization

 

Corporation

  • EIN
  • Personal identification
  • Business license
  • Certificate of assumed name/DBA
  • Corporate bylaws
  • Articles of incorporation

 

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Funding Your Business

 
Before seeking funding, you need to estimate how much you’ll need to get started. The SBA estimates that most entrepreneurs can start a micro business for as little as $3,000, with most home-based franchises costing $2,000 to $5,000 to start. Your startup costs will depend on the nature of your business. Since you won’t have the same overhead as an external office, your main initial expenditures will be equipment, inventory or product development (unless you’ll offer a service), and marketing. 

Most entrepreneurs use their personal savings and/or credit cards to start a business while those with limited resources rely on bank loans and help from family and friends. Here are other funding options to consider: 
 

Borrow from a Peer-to-Peer Lending Company

 
Consider getting a loan from a peer-to-peer (P2P) lending company. The P2P lending marketplace works through a simple online platform that connects borrowers and lenders. This platform cuts out the traditional bank loan process. P2P platforms don’t lend their own funds but act as facilitators to both the borrower and the lender.
 

Consider Crowdfunding Sites

 
Crowdfunding websites like Kickstarter  or GoFundMe have facilitated the funding of a massive number of interesting business ideas. Entrepreneurs pitch their business concepts using the online platform. If site visitors are intrigued by the idea, they contribute money towards the fundraising goal. In return, entrepreneurs offer incentives or rewards to contributors. 
 

Rollover Retirement Funds Into Your Business

 
With a Rollover for Business Startups (ROBS), you can invest retirement funds from a 401(k) or individual retirement account (IRA) into your business without paying early withdrawal penalties or taxes. Studies have shown that business owners who use a ROBS often see higher success rates than those who use traditional business financing. 
 

Apply for an SBA Loan

 
The Small Business Administration (SBA) offers several loan guarantee programs to help business owners obtain needed financing. ()The SBA doesn’t fund the loans but acts as a guarantor in the event of default. Borrowers need to meet the SBA’s somewhat strict qualification requirements. 

If none of the above funding ideas interest you, here are businesses you can start with little to no money. 

 

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Create a Marketing Plan

 
Your marketing plan should detail how you plan to reach your target market. Your target market must be well-defined to successfully write your marketing plan. Your plan should include how you’ll sell to that market, how you’ll differentiate your business from competitors, what your pricing plan is, and what types of sales activities and partnerships you’ll engage in. It should also include cost estimates for the sales activities you plan to engage in. Your marketing plan should address the following:
 

  • Positioning statement – Your positioning statement is a brief statement that tells how you’ll position your business in the marketplace. What benefits do you offer that your competitors don’t? 
  • Pricing – How will you price your product/service?  Will you use cost-plus pricing where you add a mark-up to your costs? Or, will you use market-based pricing which is based on what competitors are charging?
  • Promotion – How will you communicate your offerings to your target market? Your promotion methods should yield a favorable return on investment.  How will you package your product? What types of advertising will you use? Will you seek media coverage? Will you reach your target market by publishing useful information such as a blog? Will you use social media to reach potential customers? Will you partner with other companies to increase your reach? 

 
Since the majority of consumers search online for local businesses, part of your marketing plan should include establishing an online presence. You can do this by:
 

  • Creating a website – Invest in an aesthetically-pleasing website that clearly describes your products and services. Customer testimonials, a list of current B2B customers, and easy-to-find contact information will add credibility. To encourage customer interaction, include links to your social media profiles. Register your site on Google My Business to attract local customers.
  • Advertising on social media – In addition to gaining and engaging followers, social media can be used to advertise your business and expand your market.  For a fraction of the cost of traditional marketing methods, social media platforms allow you to place ads that will show to a highly targeted audience (those most likely to purchase your product/service). Platforms like Facebook also employ retargeting techniques that show ads to users who visited your website without making a purchase. 

 

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Set Up Your Home Office

 
Setting up a home office can be challenging for some entrepreneurs, especially if space or funds are limited. Then there are the endless distractions that can make it difficult to separate your professional and personal lives. Your home office should have enough space to accommodate the equipment needed for your business. It should also be located in an area with minimal noise and distractions. A workspace that also encourages productivity is an ideal setup. 
 
Regardless of your business type, you’ll likely need some of the following tools and equipment:
 

    • Computer A computer is needed for everything from creating documents to marketing your business to communicating with customers online.

 

    • Reliable high-speed internet access A reputable provider of high-speed internet access will help you perform tasks faster.

 

    • Phone service A Voice over Internet Protocol (VoIP) service like RingCentral is an affordable option for home-based entrepreneurs. It doesn’t require adding an additional phone line.

 

    • Combination printer, copier, fax, and scanner Print and scan documents, create and print marketing materials without having to leave your home office.

 

    • Ergonomic desk and chair Ergonomic office furniture (which directly affects your health) is a wise investment since you’ll likely spend many hours in your home office. 

 

Tips for maximizing productivity and minimizing distractions:
 

  • Keep your home office separate from your living space.
  • Set boundaries with family members by enforcing your office hours.
  • Create ambiance with lighting, décor, and music. Make your space inviting.
  • Employ processes and procedures to add structure to your workday.
  • Take breaks.
  • Don’t forget to take home office tax deductions.

 

Get Business Insurance 

 
Don’t let a catastrophic event force you out of business. Your homeowners or renters policy may not cover your home office equipment or accidents involving clients or delivery people. There are commercial insurance policies that address the risks that most business owners face. For example, a General Liability Insurance policy is the minimum amount of insurance that all businesses should carry. It will protect your business from the most common incidents:  non-employee claims of bodily harm, property damage, and harm to reputation.

 

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Managing Your Finances

 
Establishing sound accounting practices at the outset will keep your home business financially healthy. If you’ve already developed a business plan to guide you through starting and managing your business, the financial projections section takes into account what you expect to bring in (income) and what you expect to pay out (expenses). Tracking income, expenses, and cash flow is part of an effective financial management system.  This will also alert you of a cash flow crunch ahead of time.  
 
Early on, you can use a simple bookkeeping system to record income and expenses. As your business grows, you may need professional guidance from a bookkeeper or accountant. You can also use one of the many accounting software programs to automate your financial management process. Both will save you time so you can concentrate on running your business. To effectively manage the financial aspects of your business:

 

    • Keep business & personal expenses separate A business bank account will help with this.
    • Stay on top of invoices & receivables Sending invoices immediately helps to maintain healthy cash flow.
    • Monitor labor costs Labor costs can account for as much as 70% of total business costs.
    • Anticipate major expenditures Plan for large expenditures like equipment to avoid a cash flow crunch.
    • Maintain accurate inventory records To maintain an accurate inventory value on your books and know when you need to reorder, inventory records should include purchase dates, prices, and sale dates.
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Managing Cash Flow 

 
For a small business, cash flow problems can have dire consequences. You can’t make payroll, buy inventory or pay rent. Projections of income and expenses will help you anticipate any cash flow issues so you can get in front of them.  To avoid a cash crunch:
 
 

    • Invoice promptly & offer multiple payment options – Invoice as soon as work is completed and make it easy for clients to pay by offering multiple options.
    • Monitor invoice age Create a system for staying on top of aging invoices.
    • Delay your payables Try to negotiate more favorable terms with creditors.
    • Establish a relationship with your invoice payer Obtain contact information for the person at the client company who is directly responsible for paying your invoices. You’ll have someone to contact if payments are delayed.
    • Creatively boost sales If sluggish sales contribute to your cash flow problems, think of novel ways to give sales a quick boost.
    • Maintain a cushion Maintain cash reserves in a savings or interest-bearing checking account or apply for a business line of credit. This will help you meet short-term working capital needs.

 

 Final Thoughts

 
Some of the most popular businesses in the world (i.e. Microsoft, Apple) had humble beginnings. Their resourceful founders set up shop in a garage. Who knows? You could produce the next big thing from your home office. 

A great business starts with a great idea (or reinterpretation of a great idea). But, it doesn’t end there. You could have the best idea in the world but if you don’t have the drive and determination to weather the inevitable challenges, success will be out of your grasp. 

Your home business also needs a strong foundation which requires extensive research and planning. The importance of a sound business plan can’t be stressed enough. Laying the groundwork for your business will set you on the path to home business success.  

 

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