How to Start a Small Business at Home

Many popular businesses, such as Microsoft and Apple, started their journey in a garage. If you have similar aspirations, start the process by learning how to start a small business at home. The process is similar to opening a brick-and-mortar business—sometimes with lower startup costs. Some of the steps are different, such as the need to obtain an at-home business license and learning online marketing.

Here are 10 steps for starting a business from home:

1. Come Up With a Home Business Idea

If you don’t already have an idea, the first step to coming up with an idea can be the hardest step. Many entrepreneurs know exactly what type of at-home business they’re going to open. For example, someone who has worked in an industry for several decades can leverage their knowledge and network to do consulting. Other entrepreneurs may know they want to create jewelry and sell it on Etsy.

If you’re one of the entrepreneurs who know you want to create a business but don’t have an idea yet, there are steps you can take to figure out your perfect business. Mostly, business success comes from skills you already have versus skills you will build as the business operates.

“Commencement anxiety runs rampant among 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!”

– Justin Kerby, Founder, Cave Social

Leverage Your Competencies

A great way to come up with a business idea is to brainstorm about your existing skills. Focus on identifying the skills that are unique to you or that you particularly excel at. Evaluating your previous professional experiences should give you a hint. Think of instances in which you were able to provide value to the organization for which you worked: do you notice any trends?

Identify certain skills that have enabled you to both produce results for someone and generate income. You can also look at your hobbies. Do you possess certain talents or skills that can be valuable to a group of people? Your business is much less likely to fail if you’re focusing on what you’re good at.

For example, a retail store manager may possess a combination of these skills:

• Sales
• Customer service
• Inventory tracking
• Organization skills
• Team management
• Communication skills
• Knowledge of retail trends

Once you identify your core skills, the next step is to come up with business ideas that leverage those skills. If nothing immediately comes to mind, try expanding your scope by adding complementary skills that you can grasp quickly.

Going back to our retail store manager example, let’s assume that person has been providing social media marketing as a freelancer. They can combine their retail experience with their social media marketing skills to create an ecommerce store and promote the products online.

Using this brainstorming strategy, think of a unique and income-generating business idea that takes advantage of your core competencies. Give this strategy several weeks to work. One idea will preoccupy your thoughts over others. The next step will be to research your idea to make sure it’s a good one.

2. Identify Your Target Market

Once you have your at-home business idea, 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. You should identify and research your target market to ensure there are enough customers available to purchase your product.

Create Customer Personas

A customer persona is a fictionalized representation of a specific type of customer based on demographics and interests. Typically, a business will have several customer personas if they are selling to multiple customer types. You need to figure out which customer personas fit your business, because it’s important to know the demographics you should target in your market research.

Additionally, you’ll use customer personas to develop your marketing strategy. It’s wise to market directly to your potential customers. For a new and unknown brand, specifically marketing to targeted individuals is more effective than trying to market to everyone.

To help you develop your customer personas, consider listing several bits of information about your customers, such as a description, specific demographics, personality, preferences, product objectives, and pain points. Break this information into different sections and fill out each for the type of customer you will target.

Target Market Resources

Once you determine your customer personas, it’ll be time to do research and ensure there are enough customers available to make your business a success. The type of market research you do for this depends on your business. If you’re servicing local customers, you want to ensure there are enough prospective customers physically located near your business to make it successful. If you’re an online-only business, you need to focus on where customers are spending time online versus if they live near your home.

Regarding resources to do market research, ReferenceUSA is one of the best demographic resources with information on 147 million U.S. residents. Access to ReferenceUSA is free at thousands of libraries across the U.S. The U.S. Census also contains a wealth of demographic information for free.

3. Research Your Competitors

Virtually every business has a direct competitor. As an entrepreneur, you need to know which companies are operating in the same market as your company so you can differentiate your business from theirs. When creating marketing materials, you don’t want your content to mirror that of competitor businesses.

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 featured customers.
• Google My Business: Every business looking for local customers gets a free Google My Business Listing. Some businesses thoroughly fill out this listing and provide great information about their business.
• Use social media: Only 54% of small businesses have websites, but there are over 50 million business pages on Facebook. If you can’t find competitors on Google, you may find them on Facebook, Twitter, or LinkedIn.
• Physical marketing materials: Collect and consume as many marketing materials from your competitors as possible. Consider collecting flyers, ads, and brochures.
• Post a job ad: 51% of employees are open to leaving their current jobs. Take advantage of this statistic by posting a job ad designed to attract your competitors’ employees. Once hired, they can give you insight on how your competition operates.

Remember, you don’t have to do all of these competitor research tactics. You may find that you receive plenty of information simply from doing a Google search and studying competitor websites and directory listings.

Competitor Comparison Table

Once you collect information about your competitors, arrange the information in a table to compare each. In the table, list your competitors’ names, distance from your home business, what they do better than your business (advantages), and what your business will do better than theirs (disadvantage).

4. Define Your Unique Value Proposition

After completing your comparison table, you will know how many competitors are in your market and their important features. It will be extremely difficult for you to win over their customers if you offer 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 you gather from your research, you can come up with a unique value proposition. Think of this as what separates you from your competition, while at the same time something that your customers want. To come up with a unique value proposition, examine what everyone else is doing and the current market. 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 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 steps an individual can take to help build a unique value proposition using the data they’ve gathered:

• Evaluate the current market: 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.
• Determine a 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.
• Offer a 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 penetrate the market and put your home business in a better position to succeed. Use the unique value proposition to make a clear and concise statement of why you’re better than the competition.

5. Test Your Home Business Idea

Next, you’ll want to test your idea to see if customers will actually pay for it. Your business idea may look 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.

When testing your idea, generally avoid family and friends. Their feedback will be skewed due to your prior relationship. While it’s fine to get their feedback, the real test of success of a product or service is a paying customer with no prior relationship.

Here are a few tips to help you evaluate the viability of your idea:

Introduce Your Product or Service as Beta

Beta is when you’re testing out your product or service with the goal of receiving feedback. Find potential beta customers at trade shows, festivals, farmers markets, and other types of events where you can sell your product or service to a relatively small group of people. Consider offering discounts in exchange for customer feedback. While you can make some money with the beta, don’t let it distract you from your goal of testing and improving your idea.

You may be tempted to spend several months (or years) creating a new product to sell before launching it to a large market. We recommend starting small and thinking big. Get your product or service out to a few people as quickly as possible to receive feedback so you can tweak the product or service before going full-fledged.

Work Part-time for Your Home Business

Entrepreneurs take calculated risks. If you’re currently employed, it’s wise to use your free time to evaluate whether your idea has the potential to generate income before jumping ship. Sell the product or service part time to determine if it will sell before giving up your full-time income.

Offer Your Product or Service at No Cost

If you’re offering a service, find clients who require your expertise. Offer to work for them for free, but request an online testimonial in return. By working for free, you can gain valuable experience, build your portfolio, and build a quality online presence with positive reviews.

Run a Crowdfunding Campaign

A great way to test your business idea without spending a lot of money is to run a crowdfunding campaign. This is preselling a product before you’re ready to deliver it so you can raise money to create it. Crowdfunding is a great way to determine if there is a market for your product. Typically, a crowdfunding platform charges a 5% fee of the total amount raised plus a 3% transaction fee.

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 will be equipment and marketing.

Set Up Your Office

A significant part of your capital will 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, editing software, and a computer.

Regardless of the nature of your business, you will most likely need some of the following equipment:

• 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 and $1,500.
• Fast and reliable internet access: Invest in a reputable service provider that offers high-speed internet. Expect to pay between $85 and $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 and $10 per month.
• Ergonomic desks and chairs: Ergonomic furniture is a solid investment because you will likely spend many hours in your office, especially in the early stages of your business. A chair will directly impact your overall health. Budget ergonomic chairs cost between $35 and $160.

In addition to physical equipment, you may want to spend money on office decor. Consider adding plants, artwork, and certain colors to keep you relaxed and energized in your working environment.

Create Financial Projections

Financial projections are estimates of how much money the business will earn and spend over the first three years in business. It’s important that you have these in your business plan if you want to receive funding from a bank or investor, because they usually require it. In addition, establishing solid financial projections is essential even after you start the business. Successful companies usually produce month-by-month projections and evaluate how close they come to actuals to gain insight into how the business is really doing.

It’s important to think through what expenses you will have over the first few years in business so that you don’t run out of capital. Additionally, you’ll want to ensure you accurately predict startup expenses if you’re looking to raise capital for your business.

Instead of creating your own financial projections from scratch, consider using a premade template. A financial projections template is typically a Microsoft Excel sheet with preconfigured formulas. When you enter financial data, the template automatically updates cells throughout the spreadsheet.

7. Choose a Legal Structure

Almost all home businesses should register as a legal business entity, such as a limited liability company (LLC). This would protect a business owner’s personal financial assets if a lawsuit ever occurs against the business. Incfile is an online legal service that assists business owners with registering their company as a legal entity with the state.

The table below shows the requirements for each business structure:

At-home Business License

If you have customers, employees, or are creating products in your house, your city may require an at-home business license. This license is generally required to ensure that the business operating out of a home isn’t doing anything to cause harm to the public.

The house may be subject to an inspection from a city official. To determine if your city requires an at-home business license, check with your city’s official business registration website.

8. Open a Business Bank Account

Once you’ve registered your home business as a legal entity, 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. Additionally, separating personal and business finances helps to ensure a smoother federal tax audit, if one were to ever occur.

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. Which one you choose depends on the type of business you have.

The table below shows the advantages and disadvantages of each account type:

If you decide a business checking account is the best option for you, look for one that doesn’t charge a fee for meeting a minimum balance requirement. Most big banks require a balance of at least $1,500, or they will charge a fee. Novo is a business bank account designed for entrepreneurs and freelancers. It doesn’t require a minimum balance and provides free invoicing software.

Visit Novo

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.

When reviewing bank accounts, 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, and deposit fees. These fees can pile up without you noticing.
• Online features: Choose a bank that provides online services such as online bill payment and mobile deposits.

Keep these factors in mind when choosing a bank account for your business. They can help you run your business with limited costs and the ability to fund unexpected needs. Additionally, before deciding on a bank, read its mobile app reviews. You may be accessing your account through mobile more than a desktop.

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:

9. Financing for Your Home 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% of small businesses used their personal finances to fund their business, while 16% went to banks, and 6% 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.

Rollover Your Retirement Funds Into Your Business

A Rollover for Business Startups (ROBS) lets you invest retirement funds in a new business without paying taxes or early withdrawal penalties. A ROBS is not a loan or withdrawal; instead, it allows you to tap into your retirement funds early. A ROBS is a great way to use your 401(k) to start a new business, particularly if you have more than $50,000 in qualifying retirement savings. There are no monthly payments and repayment is not required.

Tap Funds From Friends & 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 getting money from friends or family is not an option, consider applying for a loan from peer-to-peer (P2P) websites. P2P platforms like the LendingClub match borrowers with investors. They offer small business loans from $5,000 to $300,000 and allow you to pay them back over one to five years with a typical APR of 9.77% to 35.71%. This gives you 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% APR for new clients while providing rewards or cash-back programs. On average, credit cards charge a 16% annual interest rate plus fees of about $50 to $100 annually. 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, your local bank does. It’s difficult for an at-home startup business to receive funding from a bank for an SBA loan.

A bank is typically looking for at least three years of consistent income before lending to a business. If you’re a startup, the bank wants to have access to the loan amount in a liquid account, such as a certificate of deposit (C.D).

To qualify for an SBA loan, your credit score must be above 680, and you need to be able to put up 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% to 9%.

“It is critical that a business remains lean. We took out sequential small SBA loans as needed. Define the minimal viable product or service you need 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.”

– Emily Purdom, Founder, DotComTherapy

10. Market Your Home Business

Since your home business is new, you need to market it to let potential customers know it exists. Additionally, your marketing efforts should help customers understand how your product or service is different from or better than your competitors. Speak directly to your potential customers’ pain points to win them over and convince them to do business with you.

Create a Word of Mouth Program

Close to nine out of 10 customers rely on word-of-mouth recommendations before making a business decision. 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

It is estimated that 46% of U.S. small businesses don’t have websites. This means that almost half of your competitors are losing potential business because they don’t have an online presence.

Fortunately, there are many services available to help you launch your own website quickly and easily. Using site builder and domain host DreamHost, you pay less than $5 per month for hosting and get a domain name and website builder tools for free.

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

Many new business owners believe they need to blog regularly on their website. This is not required for all business owners. Blogging is a great way to show you’re an expert in your industry, but if you don’t believe it will help you get more sales, don’t do it.

Create a Google My Business Listing

Every business that has local customers gets a free Google My Business (GMB) Listing. This listing provides important information about your business in Google searches. As an at-home business, you can hide your home address in your GMB listing and list the city in which you operate.

Leverage Social Media Ads

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. You also get to reach those in your audience who are most likely to purchase your products or services at a fraction of TV and radio advertising costs.

Retargeting is a paid advertising technique, employed by social media platforms like Facebook, to help you 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% 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. The Lookalike algorithm targets people who are similar to your Facebook followers or to an audience that shares the same qualities, such as demographic information and interests.

For example, a home-based massage service business can buy ads that target 30- to 55-year-olds living in a specific area with an interest in wellness. The ads may appear on your targets’ news feed and the right column of the page for optimal exposure.

“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 audience’s biggest challenge will skyrocket the speed and level of results you currently think possible.”

– Richard Matharoo, Founder, RichardMatharoo.com

Frequently Asked Questions (FAQs) for Starting an At-home Business

This section includes the most frequently asked questions about how to start a small business at home.

How can I start my own home business with no money?

There are a couple different options to start a business if you have no money. The best option is to offer services that don’t require any additional costs for you to provide. What skills, software, or tools do you already have that allow you to offer a service for free? For example, if you already own a dog, maybe you can start an at-home pet sitting business. Or if you already possess design-related skills, maybe you can make graphics for a small business’ social media posts.

Another option to start a business with no money is by running a crowdfunding campaign. Crowdfunding allows you to presell products before making them. For example, if you wanted to start an at-home bakery, but need to raise $3,000 for equipment, you could presell baked goods on a platform, like Kickstarter, to raise funds. Before starting a crowdfunding campaign, it’s important to have a network of potential customers who are interested in buying your products.

What are the most successful small businesses?

Generally speaking, franchises tend to be the most successful small businesses. Franchises give you all the tools necessary to succeed, such as marketing materials, forms, and business systems. The downside to opening a franchise is the cost to start one, which can be more than starting a business from scratch.

A popular at-home franchise is Cruise Planners. People who own this franchise connect interested customers with cruises and trips all over the world. Many customers don’t have the time or interest to research a cruise trip, so they will seek out a professional for help.

What are the requirements to start an at-home business?

The requirements to start a business depend on the type of business and its location (city, state). You can start some businesses without any limitations. However, we recommend all businesses file as a legal entity with the state in which they will be operating. This protects the business owner’s personal assets if a lawsuit were to occur against the business.

In addition to registering the business as a legal entity, your state may require a certain license, for example, a cosmetology license if you’re styling hair in your home. Additionally, if you’re seeing customers in your home, you may need an at-home business license issued by your city.

Bottom Line

If you’re thinking of starting a small business from home, you must first determine your idea before you build its foundation, launch your business, and grow your customer base. After starting your at-home business, make wise financial decisions. Start small and think big. Once you have built up sufficient income, consider a move to a larger location.