According to the Small Business and Entrepreneurship Council, home-based businesses account for 50 percent of all companies. Starting a home business, from the ideation phase to navigating financing and legal considerations, can be an effective way to save costs while you build a solid foundation.
In this article, we’ll explore the 10 steps on how to start a home business.
Step 1: Come Up With a Business Idea
The first step is usually the hardest. Justin Kerby, founder at Cave Social, agrees:
“Commencement anxiety runs rampant amongst aspiring entrepreneurs, and pushing ‘go’ often gets put off due to a fear of failure. People will obsess over what to name their company, or what URL to use – when ultimately it’s your work ethic, drive, and passion that determine whether or not you’ll be successful. Don’t put up roadblocks. Begin today!”
As you begin, you may have the motivation to start your own business but you’re having difficulty figuring out how to start a home business and deciding exactly what it should be. There are several things to consider that will help you come up with your own income-generating home business ideas.
Leverage Your Competencies
Focus on identifying those skills that are unique to you or that you particularly excel at. Your previous professional experiences should give you a hint. Think of instances or trends where you were able to provide value.
Identify certain skills that have enabled you to both produce results for someone and generate income.
For example, a retail store manager may possess a combination of these skills:
- Team management
- Customer service
- Inventory tracking
- Communication skills
- Organization skills
You can also look at your hobbies. Do you possess certain talents or skills that can be valuable to a group of people?
Once you identify your core skills, the next step is to come up with business ideas that leverage them. If you nothing comes immediately to mind, try expanding your scope by adding complementary skills that you can quickly grasp. Going back to our retail store manager example, you might be able to add online marketing as a new skill. By combining the manager’s existing skills with newly learned online marketing ones, the person is in a good position start an online store.
Using this strategy, you can think of a unique and income-generating business idea that takes advantage of your core competencies.
Step 2: Define Your Target Market
Once you have an idea that has a potential to make money, the next step is to identify your target market. Your target market is a particular group or segment of the population that is most likely to buy your product or service. Identifying this group early on can also help you to determine whether there’s enough demand for your business.
In order to define the market for your home business idea, consider taking a funnel approach where you apply filters to narrow down your market. For instance, someone with visual creative talents and photo editing skills can work as a graphic designer. By taking a funnel approach, the graphic designer’s market takes shape:
- Who will most likely require your services? Small businesses that need images for advertising
- What is their age range? Small business owners between 25 and 55 years old
- What is their income? Ideally, someone generating the country’s median income of $56,156 annually for long-term business
- Is your business gender or culturally specific? No
You can continue this line of questioning until you identify the group of people or businesses that are most interested in your product or service.
Step 3: Research Your Competitors
Sun Tzu once said, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” While this quote was created for warfare, it’s also applicable in the business world. Virtually every business has a direct competitor. As an entrepreneur, you need to know the companies operating in the same market so you can differentiate your business from theirs.
Here are a few tips to gather information about your competitors:
- Conduct a Google search – Use Google to find local competitors. Visit their homepages and take note of their business models, contact details and their featured customers.
- Use social media – Only 54 percent of small businesses have websites, but there are over 50 million business pages on Facebook. If you can’t find competitors on Google, you might find them on Facebook, Twitter, or LinkedIn.
- Post a job ad – 51 percent of employees are open to leave their current jobs. Take advantage of this stat by posting a job ad that looks to hire employees of your competitors. You can find out how your competition operates from one of their employees.
- Call your competitors – If all else fails, you can always try calling your competitors and ask them about their businesses. Before you can ask them anything, you need to properly frame your questions in a way that minimizes suspicion. For example, if you want to know their specialization, you can say something like, “I’m looking to switch service providers and I’m considering your company. Before I give it more thought, can you tell me what differentiates your company from the rest?” You’ll get a wealth of information using this research approach.
By knowing your competition, you are one step closer to finding an unmet demand in the market.
Step 4: Identify Your Niche
After conducting your research, you will know how many competitors are competing for the same market. It will be extremely difficult for you to win over their customers if you offer more or less the same products or services. You have to stand out and offer more value or address a specific need if you want to be successful.
Using the data gathered from your research, you can come up with a unique value proposition. Examine what everyone else is doing and the current market situation. Then, determine how you can provide a better solution, offer a better price point, or both.
For example, someone looking to start a PC repair home business discovers that all firms providing the same service in the area are all retail shops. It is common practice for retail stores to strongly recommend item replacements in order to increase sales. In this scenario, there are several ways an individual can build a unique value proposition using the data they’ve gathered:
- Current market situation – customers drive to the store to get electronics fixed, only to get recommendations to purchase new items or wait several days for basic troubleshooting, paying high costs for their time or replacement electronics.
- Better solution – offer home-based appointments to provide personalized laptop or PC repair and upgrade services. Basic troubleshooting is completed within a few hours, not days.
- Better price point – customers mostly pay for labor, saving them the unnecessary expense of replacing functional components.
Defining a unique value proposition can help you easily penetrate your market and put your home business in a better position to succeed.
Step 5: Test Your Idea
Next, you’ll want to test your idea to see if it has the potential to work. Your business idea may sound good on paper, but you wouldn’t know for sure that you have something that works unless you put it in front of your market. Here are a few tips to evaluate the viability of your idea:
Introduce Your Product or Service on a Limited Scale
Find trade shows, festivals, and other types of events where you can sell your product or service to a relatively small group of people. You can consider offering discounts in exchange for customer feedback. While you can make some money here, don’t let it distract you from your goal of testing and improving your idea.
Entrepreneurs take calculated risks. If you’re currently employed, it would be wise to use your free time to evaluate whether your idea has the potential to generate income before jumping ship.
Offer Your Product or Service at No Cost
If you’re offering a service, find clients who require your expertise. While you work for free, you gain experience and build your portfolio at the same time.
You can also consider looking for social media influencers in your area. These people will have a captive audience of thousands of followers. Selling one influencer on your product can get it in front of a large and receptive audience.
Should your product fail to deliver your expected results, don’t fret. It’s better that you fail at this stage than fail after investing a lot of money. You can always go through the process discussed above several times before you settle on your business. Entrepreneurs personify persistence.
Step 6: Come Up With a Budget
With a viable business idea, your next step is to estimate how much you need to get started. The Small Business Administration estimates that you can start a micro business for as little as $3,000, or possibly even less. Of course, costs vary depending on the nature of your business. Since you are not paying for an office or a store, your main concerns are equipment and marketing. We can help you come up with a budget by looking at these two aspects of your home business.
Set up Your Office
A significant part of your capital will most likely go to materials and equipment. Depending on your business, you might have to spend more because you need specialized tools. For example, someone starting a podcasting business needs a microphone, headphones, computer, and other gadgets that can cost a lot of money. However, there are those who only need a phone and an entrepreneurial spirit to launch their business.
Regardless of the nature of your business, you will most likely require the following equipment:
- VoIP phone service – Voice over Internet Protocol (VoIP) phone services are cost efficient alternatives to traditional landlines. You can make and receive calls using VoIP technology as well as have access to a range of call management features. VoIP services cost between $10 – $50 per month.
- Computers – virtually all businesses rely on computers to perform day to day tasks such as document writing and file storage. In addition, you can use computers to market your business and communicate with customers online. Depending on your needs, computers run between $400 – $1,500.
- Fast and reliable internet access – invest in a reputable service provider that offers high speed internet. Expect to pay between $85 – $110 per month.
- All-in-one Printer, scanner, fax, and copier – print brochures, flyers, and other marketing materials without traveling to the nearest printing shop. Basic plans of online fax services cost between $9 – $10 per month.
- Ergonomic desks and chairs – ergonomic furniture can prove a solid investment because you will likely spend many hours in your office, especially at the early stages of your business, and they will directly impact your overall health. Budget ergonomic chairs cost between $35 – $160.
If you need more help in setting up your home office, click on this link: Home Office Setup.
Consider Marketing Costs
Majority of consumers use the internet to look for local businesses regularly with 53 percent of people conducting an online search at least once a month. This shows that more people rely on the internet to find products and services. Taking your marketing strategy online puts your business in front of people looking for your service on search engines. In addition, online marketing saves you money.
Let’s look at how you can market your business online:
- Purchase domain name and web host – the first step in online marketing is having a website. To create your own website, consider signing up with Bluehost. You can get a domain name and a web host for only $2.95/month.
- Advertising on Facebook – the social media platform offers powerful tools to hyper target your audience. In addition, you can always control daily advertising spend on Facebook. Consider investing $100 – $200 to start.
Step 7: Choose a Legal Structure
Home businesses have a few options in registering the business structure of their firm. Each structure offers its pros and cons. The table below shows the advantages and disadvantages of each structure:
|Sole Proprietorship||Single owner has total control over the business; involves little paperwork||Offers no protection against liabilities of the business||Around $100 but costs vary|
|General Partnership||Requires little paperwork and owners divide control of the firm as they see fit||Owners can be held for liabilities of the business and conflict may arise between owners||Around $125 but costs vary|
|Limited Partnership||Offers structure for the partnership and facilitates capital raising from external sources||Since partners are limited, they have no control on how the business is managed||Around $100 - $200 but costs vary|
|Limited Liability Company (LLC)||Offers protection from personal liability||Less than ideal for businesses that seek to get funding from investors||Around $125 but costs vary|
|C Corporation||Offers protection from personal liability plus the advantage of raising funding||Expensive to form and taxation is doubled||Few hundred dollars depending on state requirements|
If you need more help in deciding the most suitable structure for your home business, visit RocketLawyer.
Step 8: Open a Bank Account
Once you’ve registered your home business, the next step is to open a business bank account. Having a business bank account effectively separates your personal and business expenses so you can avoid cash flow issues. In this section, we discuss how to select your business bank account type, the right bank for your business, and the required documents.
Select Your Business Bank Account Type
There are three types of business bank accounts that you can choose from: business checking account, business savings account, and business certificates of deposit. The table below shows the advantages and disadvantages of each account type:
|Business Checking Account||Provides the option of using a debit card or physical checks to pay business expenses; has no transaction limit||Money deposited does not earn interest|
|Business Savings Account||Money deposited earns a small interest over time; can be linked to checking accounts||Often comes with a transaction limit|
|Business Certificates of Deposit||Deposited money earns a higher interest rate than conventional savings accounts||Comes with terms which reduce liquidity as you can’t withdraw your money until term is over|
Choose the Right Bank for Your Business
Every business has its own unique needs. Before you open a bank account, take time to look around and see which bank can best accommodate the needs of your business. While doing that, you’d want to consider these factors:
- Services – other than deposits, banks often offer additional services such as small business loans and credit lines. Build a relationship with a bank that offers such services in case your home business needs it in the future.
- Bank fees – take note of banking costs such as ATM fees, monthly services fees, or deposit fees. These fees can pile up with you noticing.
- Online features – choose a bank that provides online services such as paying bills online and mobile deposits.
Keeping this factors in mind while choosing a bank for your business account can help you run your business while limiting costs and addressing unexpected needs.
Prepare the Required Documents
When you’re ready to open a business bank account, you have to show documentation to confirm the name and nature of your business. On top of that, you’ll have to provide documents to prove that your firm is registered with the IRS and show that you have the authority to create the account. Other requirements depend on your business structure.
The table below lists the typical requirements to open a business bank account based on your business structure:
|Sole Proprietorship||• Social security number|
• Two pieces of personal ID (driver’s license, passport, or social security card)
• Doing Business As certificate
|LLC||• Federal Employee Identification Number|
• Signed operating agreement
• Signed Declaration of Unincorporated business
• Business license if available
|C Corporation||• Federal Employee Identification Number|
• Certified Articles of Incorporation
• Corporate Charter
• Business license if available
|S Corporation||• Federal Employee Identification Number|
• Certified Articles of Incorporation OR Corporate Charter
• Signed corporate resolution and signature card by account signers
• Business license if available
For more information, click this link: How to Open a Business Bank Account.
Step 9: Finance Your Business
While most entrepreneurs rely on their personal savings to start a business, others seek funding from banks or family and friends. In fact, 75 percent of small businesses used their personal finances to fund their business while 16 percent went to banks and six percent solicited the help of family and friends. Let’s look at several funding options and see which one’s the best for your home business.
Tap Funds from Friends and Family
You can talk to your friends and family and introduce your business idea. If they like it, offer the opportunity to invest in your home business. You can take the money as a loan or you can offer them a slice of your business. If you take this route, be sure to have an attorney draw up the paperwork to avoid problems in the future.
Borrow from a Peer-to-Peer Site
If friends or family is not an option, consider getting a loan from peer-to-peer websites. P2P platforms like the LendingClub match borrowers such as yourself with investors. They offer small business loans from $5,000 to $300,000 which you can pay back over one to five years with a typical APR of 9.77% to 35.71%. You get quick access to funds while investors enjoy solid returns over time.
Use Credit Cards
Another option to fund your home business is to use personal and business credit cards. Many offer 0 percent APR for new clients while providing rewards or cashback programs. On average, credit cards charge 16 percent annual interest rate plus fees of about $50 – $100. With credit cards, you don’t have to draw from your personal savings to fund your business.
Apply for an SBA Loan
The Small Business Administration (SBA) offers loan guarantee programs. A loan guarantee means that the SBA does not provide loans. They just guarantee the loan provided by an intermediary.
To qualify for an SBA loan, your credit score must be above 680, and you need to be able to put up a collateral for the loan like real estate property. If you qualify, you can borrow up to $250,000, but expect to pay an annual interest rate of 6 – 9 percent.
Get Capital from Crowdfunding Sites
People with interesting business ideas often go to crowdfunding websites such as Kickstarter or GoFundMe to get funding. Entrepreneurs pitch their business ideas on the online platform to appeal to the crowd. If people like your idea, they share any amount to help you reach your fundraising goal.
Crowdfunding websites charge between 5 to 10 percent of the money that you raised. On top of that, you offer incentives or rewards to people who funded your business such as gifts or shares of your company.
For an in-depth discussion of each funding option, click this link: Best Startup Business Loans.
As you gather capital, Emily Purdom Ed.S. CCC-SLP, Co-Founder at DotComTherapy, suggests that you fund your minimum viable product:
“It is critical that a business remains lean. We took out sequential small SBA loans as needed. Define what is your minimal viable product or service to begin bringing in revenue and fund that. Through that initial influx of cash, you will learn what is most important to seek funding for and what can be pushed down the line while organic cash flow develops.”
Step 10: Market Your Business
Since your home business is new, you need to market it to let your potential customers know that you exist. In addition, your marketing efforts should help your customers understand how your product or service is different from or better than your competitors. Kirby Ingles, Life Coach at Kirby Ingles Life Coaching, echoes this sentiment:
“Put your ideas out there and let people begin to talk about their experiences and let them ask you more questions. Those questions will help you understand what they want to know more about”
This will help win them over and convince them to take the risk of trying a new business.
Create a Word of Mouth Program
Close to 9 out of 10 customers rely on word-of-mouth recommendations from people they know. As a startup, you can use word of mouth marketing by creating a referral program. Start with your friends and family. Ask them if they know someone who can benefit from your product or service. You may also want to consider offering incentives for referrals, such as commissions or rewards.
Create a Website
46 percent of small businesses in the US don’t have website. This means that almost half of your competitors are losing potential business because they don’t have an online presence. Fortunately, however, there are many services available that can help you launch your own website quickly and easily. For example, Bluehost can get you started with a domain name, web hosting, and their website builder tools including WordPress for only $2.95/month.
Don’t let this competitive advantage go to waste. Invest in a simple yet aesthetically pleasing website that provides the following information about your company:
- A clear description of your products and services
- Easy to find contact details
- List of current customers
- Customer testimonials
- Operating hours
- Links to social media profiles
Once your website is up and running, register it on Google My Business. You get a free listing that appears in front of people searching for your business on Google Search or Google Maps.
Leverage Social Media Marketing
There’s more to social media than gaining and engaging followers. It is also an effective platform to advertise your business and expand your market. With paid social media ads, you make the most out of your investment with highly targeted advertisements.
Retargeting is one of the techniques employed by social media platforms like Facebook to reach your audience. Your ads are only shown to users who visited your site without purchasing. Users who are retargeted with display ads are 70 percent more likely to make a purchase on your website.
Facebook also offers Lookalike Audience so you can reach new people who are likely to be interested in your service because they’re similar to the fans of your page or to an audience that share the same qualities such as demographic information and interest.
For example, a home-based massage service business can buy ads that target 30 – 55 year olds living in a specific area with an interest in wellness. The ads may appear on your targets’ newsfeed and on the right column of the page for optimal exposure.
As you consider investing in social media advertising, Richard Matharoo of RichardMatharoo.com suggests that you focus on promoting your strongest offer:
“In terms of marketing, pick your strongest offer and place it in front of a targeted audience. A simple Facebook ad with the correct sales funnel solving your audiences biggest challenge will skyrocket the speed and level of results you currently think possible.”
With social media advertising, you get to reach your audience who are most likely to purchase your products or services at a fraction of TV and radio advertising costs.
Now that you’ve launched your business, The Content Factory owner Kari DePhillips offers an interesting recommendation:
“I’d recommend that work-from-home entrepreneurs consider NEVER getting an office. There’s a huge competitive advantage to having a team that works from home. First, you save on the office overhead costs. Second, you’re not limited to sourcing talent in your local area. Third, everyone saves a lot of time in unpaid labor. I ran the numbers and it works out to 500+ hours per year.”
The Bottom Line
Many popular businesses such as Microsoft and Apple started their journey in a garage. If you’re thinking of taking the same route, you must first determine what your home business will be before you build its foundation, launch your business, and grow your customer base. By following the tips in this guide, you’ll be well-positioned for success.