Starting a business from home is an alluring idea. You get to be your own boss and work from the comfort of your own home.
Many successful businesses have begun this way, but many have also failed. Like any new business venture, starting a home business takes careful thought and planning, plus a few additional considerations home-based entrepreneurs may not think about initially. Trust me, I’ve learned from experience.
Once you’ve landed on an idea that matches a passion or fills a market need, pause to consider these important aspects of starting a home business so you know exactly what you’re about to embark on.
Consult with Experts
A business is a business, whether it’s in an office or your home. That means there are many legal, insurance and other nuanced aspects to consider before you open your proverbial doors. Make appointments with business consultants, legal experts and business insurance agents to get all your questions answered and make sure you fully understand what’s expected of you as a business owner.
Start by running your plan by a business consultant. These professionals can give you an idea of what to expect from the market. This is valuable information, particularly if you’re going into a trendy service area (like cupcake baking).
They can also let you know what you’ll likely experience in the first few months—such as securing a business loan or expenses you might not have considered.
After that, you should meet with legal and insurance experts to understand any business regulations and laws in your city and state that could affect you. This is also the time to discuss plans to protect your private assets from your business accounts.
Understand Laws & Regulations
Starting a business, even a small home-based one, requires federal and state permits, licenses and inspections depending on the industry. You don’t want to start your new business off on the wrong foot by operating illegally.
Look into what it would take to form a limited liability company (LLC) or incorporated corporation for your business. From there, consider tax implications—you’ll need to know these so you can get a good understanding of how much start-up capital you’ll need and what your breakeven point is.
If you plan to have employees from the start, even one or two, you’ll need guidance on employment law as well.
The legal consultant you meet with can help you navigate these requirements, but it’s a good idea to do some research beforehand to get a base understanding and form questions. Also, make a mental note of how often your permits, licenses and inspections need renewal so you can build those expenses into your business plan and budget.
Honestly Evaluate Startup Costs
This is another reason it’s smart to meet with a business consultant and a legal expert who have real world knowledge of the fees associated with starting a business. Your best guess might be spot on, or it could be way off.
Beyond fees, consider physical capital. Do you need to invest in a new computer, printer, scanner, manufacturing equipment or any other hardware necessary to do a professional and efficient job?
Taking an idea from a hobby to a business increases customer expectations, and you need to be able to meet those expectations. Look at your home and factor in any costs you might incur to retrofit space in your house to serve as your new office or workshop.
Little things, like business cards and a website, are relatively small costs that can add up, so they shouldn’t be discounted or ignored. Businesses that require an inventory or raw goods have higher startup costs that trickle down into other considerations (such as space).
Business plans should also include cash flow projection. In my case, I was grateful that I took the time to run projections when I founded Frame Destination from my home in 2004.
Even though I was assuming growth, it turns out that since my business had low margins, growth would cause negative cash flow, a big surprise to me.
For example, if you sell $500 in product and your material cost was $300, you have grossed $200. So, if you want to sell $900 in product the next month then you will need an extra $240 worth of materials. However, you only grossed $200 the previous month. This realization increased my startup costs significantly.
Consider How Much Space You’ll Need
Your home wasn’t necessarily built to house a business, so you need to think about the venture you’re about to start and how much space it’s going to take up. A service company can fit comfortably in a home office, but a production or manufacturing business will likely need more space.
Identify space you can dedicate to the company so that the business is reasonably separated from your personal life. This is particularly important if you’re storing important paperwork or products, which need to be clearly identified as business-related to help keep finances and inventory straight.
Don’t forget to consider company growth. Do you have room to expand if needed or will you quickly have to move to a different location if your business is successful? Having an expansion plan isn’t only important for physical space, it will also help you budget properly.
I started my business in my garage, relegating our cars to the outside curb. After it had consumed 100% of the garage, I had to get a storage unit for the stuff we used to store in our garage.
And then it overflowed into the dining room, spare bedroom and sometimes the living room. Be prepared and have a plan—and don’t forget to clear that plan ahead of time with anyone you live with if it might take over more of the house.
Further growth required getting an additional storage unit for business-related materials. This turned out to be a big plus because during this time I was still working my day job and was not home to receive material shipments.
I gave the storage unit manager the key to my unit, and he received shipments for me during the day.
Don’t Neglect the Little Things
You’re a business owner, which in today’s day and age means you need business cards, a website, a professional email address and other little things that are easy to overlook when you’re distracted by more pressing business needs.
Home startups need these seeming inconsequential components for one major reason: professionalism. People are increasingly selective of who they do business with, and you need to convince potential consumers that you and your company are legitimate and trustworthy. If your business is in your home, you don’t necessarily want that to be obvious to potential customers.
Plus, if you live in an apartment or condominium, you may be faced with complaints from your neighbors or legal issues related to zoning. Once it became obvious to my neighbors that I was running a home-based business in my condo, not hard to figure out since I had a giant frame saw with a loud air compressor running at night, I began getting complaints.
My Home Owner’s Association board pointed out that I was in violation of HOA and city zoning laws and began pressuring me to relocate the business. Luckily, the board was understanding and worked with me on a move-out schedule.
Invest in a website, even a simple one. Having a web presence is critical to business legitimacy in the 21st century. Explain your business, what you do and include contact information. You can also do this with a Facebook business page, though having both is better. Think of your website as another type of business card. Business cards don’t make or break a business, but they are expected, and the same is now true of websites.
Your company should have its own contact information—again, that separation of business and personal goes a long way to proving professionalism. Create a separate, professional-looking, email address for business purposes and get another phone line to keep business and your personal life apart.
Top it all off with high-quality business cards—there are plenty of websites that sell large quantities of affordable and customizable cards. Use these cards to market yourself and spread the word about your new business at local shops and cafes and through friends and new customers.
Think Before You Leap
If you decide to start a business at home, remember that it doesn’t have to be your full-time job at first. When starting any new venture, it’s good to have a financial safety net and many entrepreneurs keep their day jobs until their new startup grows big enough to demand full-time attention and offer full financial support.
Be careful not to rely too heavily on savings and think long and hard before dipping into a retirement fund. Not all home businesses will be successful, and losing your personal savings can have a major impact on your financial situation and eventual retirement plan.
If you want help budgeting for your startup and deciding how to secure the capital while preserving the integrity of your personal bank accounts, consider adding a financial advisor to your expert consultants.
From the Trenches
I kept my day job and used it to help fund my business. Since it was in my home, the overhead was very low making it easier for the business to be cash flow positive. Since it was cash flow positive, I didn’t have to worry about running out of money right away and had time to iron out all the kinks.
Once I worked out the formalities and had some consistent growth, I created a timeline for quitting my job. I estimated how much revenue the business needed to justify having its own space and how much cash and credit I would need. I then worked on putting that in place.
Having good credit is crucial. I got my credit score as high as possible while I still had income from my 9-5 job. It was a good thing I did, because after I quit, my income dropped severely. When you have very little income, and it comes from a business less than five years old, banks do not want to give you any credit.
Are You Ready?
It’s a lot to consider, but don’t be put off by all the details. With a good idea, a captivating product or service and strong planning, your home business can grow into a national corporation.