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Small Business Myth-Busters
“Myths”, and “urban legends” persist in the public’s perception despite their obvious misinformation. This is true in the small business arena as well as in other facets of life.
These myths have a negative impact on small business success because legends can reinforce or encourage bad decisions by aspiring entrepreneurs and small business owners - decisions that can be critical and sometimes fatal to the establishment or growth of the businesses. The myth-list is a long list, but these eight are the most common.
Myth #1: “I don’t need a written business plan - I have everything in my head.”
Reality check: For any new small business to enter the marketplace, the owners need a detailed business plan which lays out their target market, funding, organization, and anticipated revenue flow. A sound business plan is mandatory if the business is seeking a business loan or status as an 8(a) socially or economically disadvantaged company with the SBA. In addition, it prevents business owners from failing to accurately predict revenue, cash flow, and other critical items needed to survive.
It is human nature to be optimistic - it is much easier to be optimistic if the data is only in our minds. Sometimes ideas that seem great in concept present an entirely different picture when put down on paper.
Always include detailed revenue projections in your business plan and be realistic.
Myth #2: “I’m a Veteran/Service Disabled Veteran—the VA will give me a business loan.”
Reality check: Unlike the VA Home Loan Guarantee Program, the VA does not provide loan guarantees for veterans to start a business. There is, however, a loan program targeted to veterans at the US Small Business Administration called “Patriot Express” - if you are a veteran looking to start a business, the SBA (or their resource partners such as SCORE) can provide you with more information.
Myth #3: “The SBA will give me a grant to start a business”
Reality check: The SBA does not provide grants to start a small business. This myth continues to flourish, mainly driven by TV commercials for reference materials that supposedly provide the “secrets” to government grants.
Remember the old adage, if it sounds too good to be true, it probably is.
Myth #4: “I can start a business and get a loan with no money down.”
Reality check: Lending institutions will require that you have some of your own capital “in the game.” The percentage varies, but 25%+ is near the norm. When a business owner has significant personal investment in their business, they naturally take greater care in the finances and success of operations, and generally have lower default rates on business loans.
Lenders will also require liquefiable collateral for the loan, and a realistic cash flow projection showing how the loan will be repaid. (See myth # 1. It’s included in your business plan.)
Myth #5: “I need to buy a building to house my business.”
Reality check: If there is one item which will doom a business, it is excessive fixed overhead costs. The last thing a new business needs is to take on a heavy overhead burden which will drive up costs and lower profits. If the business absolutely needs production, commercial, or office space, find the best lease terms available at the shortest timeframe.
If possible, work the business out of a home office or other low cost option until the business can support a better facility.
Myth #6: “I can immediately draw a salary from my new business.”
Reality check: Don’t quit your day job! Any new business requires time to be successful—in addition, invoices due to you may not be paid for 60 days or more, so you must be prepared to operate with limited cash flow. The last person to be paid in any company is the owner—employees always come first.
Ensure that you can personally survive for up to a year without drawing a salary before thinking about starting a new business.
Myth #7: “I know how to add and subtract, so I can do my own bookkeeping and payroll.”
Reality check: Good luck with that! In reality, even a very small business requires precise and lawful bookkeeping. Employees further compound the issues. Remember, for your business and employees you need to withhold and pay federal income taxes, withhold and match Social Security and Medicare payments, file business tax returns, issue tax documents to shareholders (such as K-1s), and perhaps withhold and match healthcare costs, dental, vision, 401(k), other benefit plan costs.
Commercial programs have come a long way, but unless you are truly familiar with all of the legal requirements, plan on initially paying someone to provide those services.
Myth #8: “I’m an 8(a)/Woman Owned/Service Disabled Veteran Owned/HUB Zone business, by law the government has to provide me with contracts.”
Reality check: Welcome to Federal Contracting! Yes, the federal government has goals to provide a certain percentage of commercial contracts/subcontracts to specific categories of businesses as listed above. But that doesn’t mean your business will be awarded one. Even if you fit the specific category for the procurement, you still must compete with other similar companies for the contracts.
To win, you must provide the best value to the government—in these days of reduced budgets, the lowest cost proposal which meets the technical acceptability of the procurement has a great chance to win. You must also show that you are completely capable of performing the contract—past performance documentation on similar contracts is usually required.
No designation or certification guarantees that you will be awarded federal contracts—you must, with a few rare exceptions, compete to win.
Myth #8a: “I’m an 8(a)/Woman Owned/Service Disabled Veteran Owned/HUB Zone business, by law large companies have to provide me with subcontracts on federal contracts.”
Reality check: Yes, the federal government requires large corporations to subcontract a certain percentage of most large contracts to small businesses. However, it is up to that large corporation to select which businesses it uses as subcontractors. One last bit of advice—few large companies will choose you if they don’t like working with you—personality does matter!
There are many great small companies for these large corporations to choose from—you must be better, smarter, and cheaper to be competitive.
With the right advice, your business dreams stand a much better chance of succeeding. A great resource for any entrepreneur or business owner is the US Small Business Administration—call the local office in your area for information on what products/services may be right for you.
Author: Dave Everhart is Deputy Director for the Nevada District of the US Small Business Administration, and formally an award-winning small business owner and entrepreneur.