Financial Resource Center

Small Business

Prep Your Home-Based Business for Success

by Jennifer Garrett / March 24th, 2010


They are everyone from accountants, architects, writers, graphic artists, infotechnology pioneers, and software designers to caterers, bakers, importers, and more. The professions in which home-based entrepreneurs are working couldn't be more varied. Yet the keys to running a successful home-based business are largely the same, regardless of what kinds of products or services are sold. The Small Business Administration (SBA) reports that 53% of small businesses are home-based. New businesses are starting up all the time. But before you set up shop, make sure you are positioned for success.

Get off the ground

First, starting a business generally should not be a time for experimentation. You should have some experience in the field, says Bob Cushman, CEO of a nonprofit law firm and volunteer with SCORE, a nonprofit that counsels current and would-be entrepreneurs on all facets of business management. "You really have to know the business," Cushman says. "It can't be something you studied in a book." The next ingredient is seed money. How much you need depends on your industry, but every business needs some supplies—even if it's just a computer and a cell phone. Most small-business owners also would benefit from some time with an attorney or accountant to avoid headaches and save money down the road. Also consult your credit union's small business specialist for help with everything from developing your business plan to financing and business services. It all takes money, and "nobody is going to give you a grant to start a business," Cushman says. "You have to have saved up money on your own." Dave Dickson, director of the Small Business Administration's Philadelphia District Office, agrees. "I've seen more businesses fail over a lack of financing or capital than for any other reason," he says. And, unfortunately, many businesses do fail. The statistics for small business (and most home-based businesses fall into this category) are especially sobering. The SBA reports that about 69% of small businesses survive about two years; 51% survive five or more years. So start padding the piggy bank well before you plan to open up shop.
Talk to the professionals at your credit union about your small-business needs.

Plot a road map to success

Next, a business plan is critical. It should include what services you will provide or what products you will sell, who your market is, how you will reach your customers, and, most important, how you will make money. "A business plan is a roadmap," Dickson says. It's invaluable to business owners—and, he adds, it's absolutely necessary for securing loans. Thorough planning also will uncover other vital issues. For example, zoning, business regulations, licensing, and neighborhood covenants all vary based on location and industry. So find out whether your subdivision allows you to have semitrailers depositing inventory in your driveway or if health codes prevent you from running a catering company from your home kitchen. "I can't imagine anything worse," says Jill Johnson, owner of Johnson Consulting Services, a home-based market strategy consultancy in Minneapolis. "You spend a bunch of money getting your stationery and business cards ... only to have a city inspector come knock on your door and shut you down." Also consider where you will work. Most experts and home-based-business owners agree that dedicated office space—whether it's a spare bedroom, sunroom, den, or garage—is optimal, and many of the tax rules require that you use space and equipment solely for business purposes if it is going to qualify for deductions. Separating working space from living quarters also helps you focus and sets clear boundaries for family members. Yet dedicated space is not always an option. Michele Bader Reed, who owns Mojo Home Repairs in Las Vegas, runs her business out of the 1,700-square-foot home she shares with her three children. She stores supplies in the garage and works in a three-season room for part of the year. The rest of the time, she conducts business where convenient. "I work in the living room. I work in my room. I work in the car," she says. "I work everywhere, basically." Bader Reed recognizes that her arrangement would challenge many business owners, but it works for her. She has the house to herself while her kids are at school, and she has the commitment to make things work. "I'm a single mom," she explains. "I know that if I don't get the invoices out, then I'm not going to get paid."
The Small Business Administration reports that 53% of small businesses are home-based.
Dickson also advises entrepreneurs to have reasonable expectations. He says he frequently counsels individuals who vastly underestimate the necessary amount of work and sacrifice. "They want to start their own business, they want to work three hours a day, and at the end of six months they want a million dollars in their pockets," he says. "That isn't how it works."

Reach out for guidance

Fortunately, you can learn how it does work. The SBA hosts the online Small Business Training Network, operates around 900 Small Business Development Centers, partners with nearly 400 SCORE chapters, and maintains about 110 Women's Business Centers and eight Veterans Business Centers across the country. Each offers free counseling and low-cost training. "Our business counseling is one-on-one, and it's free," says Paul Hirz, a SCORE volunteer in Seattle. "It's long-term because we prefer to mentor people. We don't make anyone rich and successful in an hour." Hirz says SCORE volunteers can help with general business issues like strategy, marketing, bookkeeping, and more. They also can help with industry-specific issues. Since they offer counseling via e-mail and phone, a retired specialty-food executive in Texas can counsel a budding gourmet-pickle maker in Massachusetts. Unfortunately, Hirz notes, many entrepreneurs fail to avail themselves of these resources. Some don't know about the services, and others assume they don't qualify. "Home-based business owners are insecure," Hirz says. "Their bookkeeping is questionable. Regulations, licenses, taxes—all those things are shaky, at least from their point of view. They are afraid that someone will expose their mistakes." But SCORE volunteers can help strengthen small businesses. They also can direct individuals to other local resources available to small-business owners, including seminars, microlending sources, and more. Starting a business can be exhilarating, as well as personally and financially rewarding. And, according to Dickson, there is one more piece of good news for the aspiring home-business owner. "Generally speaking, home-based businesses are more profitable than other businesses," he points out, citing lower overhead and favorable tax deductions. "That's a huge advantage."
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