Starting Against All Odds

Starting Against All Odds

OCEAN CITY – Credit is still tight. Consumers remain skittish. And you’ve decided now is the perfect time to start your small business.

Some of the world’s most successful businesses were established in the early stages of an economic recovery. Start-up costs, be they for materials or talent, are often lower at times like these than during economic booms. And competition is frequently less fierce.

Still, you don’t want to lose sight of your financial stability — so you’ll want to make sure you’re going about this carefully. This four-step prelaunch review can help you take the plunge with your eyes open and prepare you for both the best and the worst that the adventure ahead may bring.

1. Get a second opinion on your business plan. Even though you are enthusiastic and optimistic about the prospects for your idea, it pays to have a reality check before you commit lots of time and money to a business. Surround yourself with a network of specialists — from accountants and attorneys to your Financial Advisor — who can counsel you on a wide range of your start-up needs. "There’s no one-size-fits-all plan for entrepreneurial success, and you need to get the perspectives of a variety of experienced professionals who can look at your finances objectively," says Andy Fiol, Bank of America’s Sales Strategy Executive for the Small Business Segment, who has started several businesses himself.

2. Make sure you have enough capital. There’s no hard-and-fast rule about the financial resources it takes to get a business going, because different ventures may have very different needs. On the one hand, a home-based consulting firm may require far less start-up funding than a restaurant; on the other, your business may require you to go six months or longer without bringing in any income. In general, says Fiol, most entrepreneurs underestimate early cash flow needs and can be overly optimistic about their chances of immediate success. Look at your business plan, and then consider the very real possibility that it may cost twice as much and take twice as long to get up and running as you had expected.

3. Find the most suitable funding sources. Next, decide where you’ll likely get self-supplied capital. Do you have cash on hand? Will you have to liquidate other assets, such as stocks or a second home? Sources to avoid, says Rob Seidman, Bank of America’s Sales Strategy Executive for the Mass Affluent Segment, are 401(k) plans and other tax-deferred retirement accounts. Drawing on those funds will generate taxes and penalties that will reduce the value of your withdrawals while also undercutting your plan for retirement. And selling any assets now — especially real estate, boats or other vehicles — might mean taking a loss. That is why you need to know about all the creative financing options available.

4. Rebalance your portfolio to help offset business risks. "Small-business owners often underestimate the risks of investing in their own companies," say Fiol. "But it’s important to remember that 28% of small businesses fail within two years." The money you put into your business is a high-risk part of your portfolio, and it may be prudent to move many of your remaining resources into safer investments.

It’s crucial to be realistic when starting a business. While the headwinds of today’s financial environment need not hold you back, you’ll need a structure for deciding whether, when and how to move ahead — one that makes sense not only for your new venture but also for your overall financial situation. With the help of your Financial Advisor and a practical attitude toward the risks and rewards of entrepreneurship, you can increase your odds of success without potentially endangering your long-term financial goals.

(A Merrill Lynch wealth management advisor. She can be reached at 410-213-8520.)