- Legal Structures and Business Licenses
- Business Plans
- Purchasing a Business
- Questions Not Frequently Asked But Should Be
Do I have what it takes to own/manage a small business?
You will be your own most important employee, so an objective appraisal of your strengths and weaknesses is essential. Some questions to ask yourself are:
- Am I a self starter?
- How well do I get along with a variety of personalities
- How good am I at making decisions?
- Do I have the physical and emotional stamina to run a business?
- How well do I plan and organize?
- Are my attitudes and drive strong enough to maintain motivation?
- How will the business affect my family?
Try the Quiz for Small Business Success.
I want to open a business, but I don't know what kind of business. What should I do?
Try to find employment in a field you are interested in. Attend franchising and small business fairs. Read magazines like Inc. and Entrepreneur. If you are interested in franchising, our consultants can help you find the franchise that best meets your needs.
I would like to run my own business, but I do not want to work more than 40 hours per week. Is this realistic?
It depends on the business. However, you must respond to the needs of your customers when they want your product or service. In our experience, this typically takes more than 40 hours per week.
How long will it take me to get started?
That all depends on the business and the amount of time you have available. However, it is usually longer than you think.
I have picked out a location for my business, should I buy or rent?
Buying or renting depends on your financial and personal situation. Remember, buying the building takes start-up capital for the down payment and requires monthly payments. If your business fails, you still have to make the monthly loan payments.
What kind of money will I make?
It is hard to say. Businesses with slow inventory turnover, like a jewelry store, operate on high margins. Businesses that have quick inventory turnover, like a grocery store, have low margins. Most business owners would like to earn at least as much as they would have earned if they were working for someone else. This includes wages, benefits, and a return on the money invested in the business.
When will I start to make money?
This is impossible to say. It depends on the resources you have available. We suggest talking with people who have recently started similar businesses about their experiences.
Do I need experience in this line of business?
Generally, most entrepreneurs have knowledge and experience in the line of business they enter.
I'm ready to start a business, but I'm not sure what steps I should take.
We recommend you meet in person with one of our consultants who can talk with you regarding your plans and the steps it will take to implement them. There is no charge for in-district businesses (until fiscally sound) to meet with a consultant and you can come back as many times as necessary.
Do I need a lawyer or accountant?
Typically, most entrepreneurs hire an accountant or lawyer to handle the more complex accounting and legal activities. However, you should always learn as much as possible about these fields and how they apply to your business. Remember, this is your business and you are responsible to know, understand, and interpret what your hired professionals are doing on your behalf.
What records should I keep?
At a minimum, you will need to prepare annual tax returns. If you borrow money, you will need to provide your lender with requested information. You will want information on what is happening with the business, such as are receivables being collected on a timely basis, is inventory building up, are products being sold for more than their cost, etc. You also will need monthly financial statements, including a balance sheet, an income statement, and a cash flow statement. If you incorporate, you will need to develop corporate by-laws and hold annual shareholder and directors meetings and record the minutes of the meetings.
I am behind in my loan payments. Can you help me?
Banks sometimes are willing to grant a moratorium on payments for a short period if you ask them in advance and convince them that the problem is of a temporary nature and that you have worked out a solution. You may want to meet with a consultant to discuss your cash flow. We recommend you analyze your cash flow on a monthly basis to identify any problems before they become serious.
What is the best legal form of doing business?
There is no one best form of doing business. All forms have certain advantages and disadvantages, usually in the area of taxes and personal liability. You should consider all the advantages and disadvantages in relation to your individual circumstances. For more information, see our handouts on legal structures.
Do I need a business license?
Certain occupations and professions are licensed by the state. Additionally, localities require licenses for certain types of businesses. For information on a business license, call your local city, town, or village hall (alderman in Chicago). For information on State of Illinois licenses and permits see, http://www.illinois.gov/Business/Pages/registration.aspx or call (217) 785-0800.
How do I get a Federal Employer Identification Number? Do I need one?
You can get a Federal Employer Identification Number ("FEIN") by completing IRS Form SS-4, Application for Employer Identification Number, or by calling the IRS at (866) 816-2065 and answering their questions about the information on your Form SS-4. To obtain an SS-4 form, call (800) 829-3676, visit www.irs.gov. A sole proprietorship that does not have any employees is not required to have a FEIN. If desired, the sole proprietor's social security number can be the identification number for tax and bank account purposes. All other businesses must have FEIN.
How do I incorporate?
To create an Illinois corporation, you need to complete Form BCA-2.10, Articles of Incorporation, and file it with the appropriate fee (minimum $100) with the Illinois Secretary of State. For additional information, see our handouts on incorporating or contact us for assistance. For a fee, you may also obtain assistance from a CPA or attorney.
Is there an advantage to doing business as an out-of-state corporation?
There is an advantage for the out-of-state corporation but not for you. You will have to pay a start-up fee and an annual fee to the state where the business is located. Your corporation will have to pay a fee to qualify to do business in Illinois and an annual Illinois business fee. With an out-of-state corporation, you pay fees both to the state where the business is located and to the state of Illinois. With an Illinois corporation, you only pay fees to the state of Illinois.
Can I operate my business from my home?
Operating a business from your home is an excellent way to keep your overhead down. Check with your city or village, or alderman on business licenses that are required or zoning restrictions.
What is a business plan?
A business plan is a working document that owners use to plan, control, evaluate and manage their business. It defines the objectives of a business and describes how those objectives will be met. It also indicates how the resources of the company will be allocated. It is typically necessary to have a business plan when obtaining financing. Business plans for start-up companies are usually the most comprehensive and detailed.
Every business should have a business plan at startup, even if they are not applying for a loan from a bank. The business plan, if prepared properly, will indicate to the owners if they are on the right track and should indicate if the business will be profitable. If you are seeking startup capital from a relative or friend, you can show the business plan to them to give them confidence in your endeavor.
Will you write a business plan for me? No, but we will certainly assist you. We can provide you with information on how to develop a business plan. We also will critique it and make recommendations before submitting for bank review.
Why do I need a business plan?
Typically, you will need one to obtain a business loan. Even if you don't need to borrow money, doing a business plan is still a good idea. It helps you analyze and organize your business. You will identify your opportunities, how you will take advantage of them, and how you will overcome obstacles. You will have a budget to compare your results against. Almost all publicly traded companies prepare business plans and budgets each year. They must think there is a benefit if they take the time and expense to do this.
How do I obtain a grant from the Small Business Administration (SBA)?
Please note that the Small Business Administration (SBA) does not offer grants to start or expand small businesses, though it does offer a wide variety of loan programs. While the SBA does offer some grant programs, these are generally designed to expand and enhance organizations that provide small business management, technical, or financial assistance. These grants generally support non-profit organizations, intermediary lending institutions, and state and local governments. Please visit www.sba.gov/smallbusinessplanner/start/financestartup/SERV_GRANTRES.html for more information.
Will the SBRC loan me money to start my business?
Money is not made available to the SBRC to make business loans. We will help you apply for a loan and provide you the information you need to write a business plan and start the business.
I am a woman, minority or veteran. What programs do you have for me?
Certain minorities are given preference in the awarding of federal, state, and local government contracts. You must be registered with the appropriate agency before you receive a preference. Visit http://www.aptac-us.org/. Certain banks may have an internal quota for loans to minorities. You may happen to find a bank looking to make a loan to minorities.
What are alternative sources of financing?
Possible alternative financing sources are: oneself, family, friends, neighborhood banks, national banks, finance companies, suppliers, customers, microlenders, and sellers.
Should I see a venture capitalist?
Do not close the door on any source of financing but do not be disappointed if you are not successful with venture capitalists. Venture capitalists have many applications. They can be picky and choose only the best. Venture capitalists generally want a "piece of the action" and may want to direct certain operations. They also typically want to invest significant sums of money. Some small businesses, such as daycare centers and restaurants, do not qualify for venture capital.
How much money do I need to get started?
You need enough money to acquire the location and equipment to begin the business and enough working capital to keep you going until the business is self-sustaining. The amount varies with each business. A well-written business plan will indicate how much your particular business will require.
How do I get a loan from the Small Business Administration?
The Small Business Administration does not actually make loans. It guarantees a portion of loans that banks make. A borrower must apply to a lending institution for a loan. The lender will assess the risk associated with a loan and respond with either "yes", "no", or "maybe". For a "maybe", the lender will ask the SBA if it wants to carry part of the risk and guarantee a portion of the loan. There is a fee for an SBA guaranteed loan, and the interest rate is typically higher. On the other hand, SBA guaranteed loans often have a longer maturity than regular bank loans.
What are the different SBA loans programs?
SBA administers three separate, but equally important loan programs. SBA sets the guidelines for the loans while SBA's partners (Lenders, Community Development Organizations, and Micro-lending Institutions) make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. The Agency's Loan guaranty requirements and practices can change however as the government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking assistance in today's market.
Federal appropriations are available to the SBA to provide guarantees on loans structured under the Agency's requirements. With a loan guaranty, the actual funds are provided by independent lenders who receive the full faith and credit backing of the federal government on a portion of the loan they make to small business.
The loan guaranty which SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA Loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty.
In a variation of this concept, community development organizations can get the Government's full backing on their loan to finance a portion of the overall financing needs of an applicant small business.
What are the repayment periods for SBA loans?
SBA guaranteed loans generally have longer repayment periods than ordinary commercial bank loans. Maximum repayment periods are: seven years for working capital; 10 years for equipment; and up to 25 years for real estate.
What are the interest rates and fees on SBA loans?
Interest rates on SBA guaranteed loans generally run from 2.25% to 2.75% over prime. The interest rate may go up to 4.75% over prime on small loans. The SBA guaranty fee ranges from 2% to 3.875%. There is also a .5% annualized servicing fee.
What bank should I go to for a loan?
Go to the bank that knows you best. You may want to go to several banks and see if you can negotiate the interest rate. If you don't have a "bank that knows you best" we can provide a list of banks in your area that make SBA guaranteed loans.
I don't have any money. Will I get a loan?
Banks generally look for the borrower to provide at least 20% of the total. This percentage will likely be even higher for a startup. This is more important for some banks and less important for others. Ask your banker.
I don't have a good credit history. Can I get a loan?
The bank will do a credit check on you personally and approval for your loan will take your credit history into consideration. Bankruptcies and chronic slow pays, in all likelihood, will hinder your ability to get a loan.
How do I go about applying for a loan?
Ask your bank about a business loan. When applying for a loan, you typically will be asked to provide a business plan with projected financial statements. If you need assistance, ask us for an outline of a business plan and for help with the projected financial statements. Your bank will tell you what else it wants: such as copies of tax returns, personal financial statements, copies of historical financial statements, if applicable, and other documents it deems necessary.
I have been making a profit but have not shown it on my tax return. What will a bank think about that?
The bank will not look favorably on tax evasion. Furthermore, it will probably be very difficult to obtain a loan if you are not showing a profit.
I don't like the bank prying into my business.
If you borrow money from a bank, it will want to know everything it can about you before it lends you any money and while you are paying it back. If you don't want to provide the bank with information, you will need to consider alternative sources of financing.
I need a certain amount of money each month to provide for my family.
Will the bank allow me to take this out of the business?
Include your monthly withdrawals or salary in your business plan and be prepared to discuss this with your bank.
Why does the bank want so much information?
It is using the information you provide to determine your ability to repay the loan.
What are the C's of credit?
The C's of credit, which many lenders consider when reviewing a loan application are: character, capital, capacity and coverage, collateral and circumstances. These are given different weights by different banks and are considered along with other factors.
I have a bankruptcy in my past. Will it be a problem for me in getting financing?
Bankruptcy can hinder your ability to obtain loans. Talk with you bank to explain efforts you have made to restructure your debts.
What is the prime rate? Where do I find it?
It is the public base rate on corporate loans from the largest banks. It appears in "Money Rates" in the C section of The Wall Street Journal every day.
I went to a bank and asked about a business loan for $10,000. The bank did not seem very interested.
Banks go through roughly the same procedures for a $10,000 loan as they do for a larger loan. The fees and interest that banks charge for a loan are based on the amount being borrowed. In other words, a bank's expenses are about the same for a small or large loan, but the bank does not make as much on a small loan. To interest the bank, talk about a long term relationship with the bank including your checking account, retirement plan, short term investing of your excess funds, and borrowing in the future to finance your projected growth.
What is my target market?
Your target market consists of all potential buyers of your product or service. For example, for a gas station, it is the traffic passing on the street and may only be the traffic on your side of the street. People coming home from work are more likely to stop than people going to work. A target market may be people in a certain income or age bracket. You should know how to reach your target market and differentiate your product or service from others.
Where can I get demographic information?
Ask your trade association, chamber of commerce, library, or city hall. You also can find information at census.gov and other web sites.
What does marketing involve?
There are 4 P's of marketing: Product, Price, Place and Promotion. Marketing is your plan to apply these 4 P's to your product or service.
What is a marketing plan?
A marketing plan outlines marketing strategies and tools. It discusses the target market and the avenues through which you will reach your goals. It can describe competitors and strategies and how to deal with them. A good marketing plan will illustrate the costs of various marketing campaigns and a method by which results will be tracked. It also can include a timetable for implementation of various marketing activities and potential adjustments based on various results.
Do I need to set aside a marketing budget?
It is ideal to know what your marketing budget is and to develop the most effective marketing plan possible given your budget constraints. You should maintain marketing costs at a level in relation to the income and profit of the business.
What marketing tools should I use?
There are many marketing tools available—direct mail, advertising, brochures, web sites, business expos, and trade shows. You will need to determine which methods are most effective in reaching your target market. You may want to check out what others in your type of business are doing. Regardless of the marketing tools used, you will want it to stand out from your competitors.
What do I need to know about the competition in my industry in relation to marketing?
The basics include: names of competitors, market share, pricing strategies, locations, and types of marketing tools they use, to name a few. You can use this information to determine the benefits you offer that your competitors don't, and sell those benefits when talking with potential customers.
Will the seller finance part of the purchase price?
Perhaps. Occasionally, a seller is looking for long-term income, perhaps retiring from the business and would be willing to take payments over an extended period of time. You should always ask if the seller is willing to "hold the paper." The interest rate may be lower in this situation.
What is due diligence?
Essentially, due diligence is finding out everything possible about a business before making the decision to buy it and determining a price offer. This is all done on a confidential basis.
Should I buy the assets of a company or the stock of a company? What difference does it make?
It is generally advantageous for a buyer to buy the assets of a company. It is usually advantageous for a seller to sell the stock of a company. Buying assets provides a new stepped-up tax basis for depreciation of the assets of the business. Buying assets also avoids being responsible for any undisclosed liabilities of the company. Selling stock gives the seller capital gain treatment on the sale of the stock. Selling assets results in two levels of taxation. The corporation pays tax on gain from the sale. Then, the shareholders pay tax on gain from the liquidation of the corporation. Selling stock also lessens undisclosed liabilities.
Am I more likely to fail or succeed?
Generally, four out of five new businesses fail. According to the Entrepreneur Magazine Small Business Advisor, undercapitalization and poor management are the most common reasons businesses fail.
What can I learn from my trade or professional association?
Associations can be one of your best sources of information on all aspects of running your business. Contact them to inquire about the services they provide. Ask members about the benefits they receive from the association, and then decide if it will help in your business. Sometimes you can get a lot if information from trade and professional associations without joining. Ask for their enrollment package.
I just lost a major customer. Do I have to tell the bank where I have borrowed money?
It is best if the bank hears about it from you. You can explain why you lost this customer and what you are doing to keep your other customers. Always tell the bank the truth. You should also tell the bank when you have some good news.