Avoid pitfalls when starting a business

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Elliot Raphaelson

Many Americans dream of starting a small business. For some, it’s a way of doing something they love while being their own boss. For others, it’s an idea they turn to after losing a job or retiring.

What every aspiring small business owner needs to know is that starting an enterprise takes a lot of work and investment, and the chances of failure are high.

Most small businesses fail in the first few years, for many reasons. Many fail because the owner has little or no experience. It is difficult to succeed, even with experience, and I would discourage anybody from starting a business in a field they are not familiar with.

Another big mistake new business owners make is not adequately managing their investment capital. For example, I recently spoke to a struggling small business owner in my capacity as a counselor at SCORE, a nationwide nonprofit organization that advises people who have started a new business or are contemplating doing so.

The man and his family had started a business and had made a significant investment, both in manpower and inventory. They had completely overestimated their projected sales and now were running out of capital. They needed to borrow money to stay in business.

I had to inform him that it was highly unlikely that they would get a loan because the business did not have a history of profitability.

Get advice early

It’s a shame this individual sought advice only after the family business got into trouble. With prior counseling from experienced business owners, he might have done things differently — or not started the business in the first place.

If you’re starting a business, the advice of experienced business people in that field is invaluable. However, not everybody has a personal relationship with such mentors.

That’s where an organization like SCORE can help. Most SCORE chapters have volunteers with a wide variety of backgrounds.

When a fledgling entrepreneur comes for counseling, he or she is matched with counselors with practical experience in the business they are considering.

The counseling is free. (Similar counseling can often be found through local government agencies, chambers of commerce and universities.)

Recently, an individual with some experience in the jewelry business approached my chapter of SCORE about plans he had to open a retail store, and I arranged a counseling session with a volunteer who had owned a very successful jewelry business for many years.

Whether that counseling will make the difference between success and failure is hard to say at this point. But counseling is much more effective if it comes before a person starts his or her business.

SCORE encourages first-time entrepreneurs to take a seminar called “Starting Your New Business.” (This costs $50 for two individuals from the same business.)

The seminar discourages individuals who shouldn’t start a business and highlights the most important factors for success. It stresses the need for a sound business plan, and for hiring competent professionals such as attorneys, accountants and insurance representatives.

Insure your business

Even if you succeed in establishing a business, unexpected things can go wrong that may sink the enterprise.

Another mistake many small business owners make is to underinsure. It is especially important for anyone starting a home business to have adequate business insurance.

An excellent, comprehensive book on the subject is Insurance for Dummies by Jack Hungelmann (Wiley). Hungelmann points out that homeowner’s policies, even with optional business coverage, falls far short of covering the needs of most home-based businesses.

Most home-based business owners, he writes, are not aware of many risks associated with their businesses, and homeowner’s policies don’t cover many of the common risks.

Hungelmann explains the various types of property risks and emphasizes the importance of liability insurance.

A wise course is to discuss your liability risks with an insurance agent. Most lawsuits cost $40,000 to $100,000 to defend, and judgments or jury awards can exceed that. Being uninsured for any potential business liability risks more than you can afford to lose. Moreover, if you haven’t set up and run your business as a corporation, it can place your personal property at risk.

Too many people decide to go into business without doing their homework. Lack of initial planning is one of the most likely reasons that a business fails.

Your chances of success greatly increase if you take advantage of available resources, obtain advice from an experienced business attorney and insurance agent, and develop a comprehensive business plan before making the final decision to start your business.

For information about local and online workshops offered by SCORE, visit www.score.org. To contact the Washington, D.C. chapter for an appointment with a mentor or more information, call (202) 272-0390.

Elliot Raphaelson welcomes your questions and comments at elliotraph@gmail.com.
© 2012 Elliot Raphaelson. Distributed by Tribune Media Services, Inc. All rights reserved.