Financial planning for an uncertain job market - part 6: How to start a small business

If you’re among the growing number of wannabe entrepreneurs, this blog post is for you. We’ll cover the main steps to starting your own small business, the risks you may want to consider, plus the myriad money, tax, legal and insurance considerations, from opening a business bank account to loan comparisons.

• Is self-employment for me?
• How do I know if my business idea is strong enough?
• How do I write a business plan?
• What type of loan should I get?
• What’s a sole trader?
• Do I need a business bank account?
• What about a licence, permits or insurance?
• Will I need to pay business rates?
• Should I get an accountant?
• How do I get my company known?
• Conclusion

Is self-employment for me?

Turning a longtime hobby or great idea into a start-up can be creatively fulfilling and give you the freedom to choose your own hours. And then there’s the added allure of no boss to answer to! And no early morning commutes to the office!

But before beginning to draft a business plan, it’s important you’re aware of the commitment having your own company entails. Yes, it sounds super on paper, but in reality, self-employment can mean working long hours and weekends, risking weeks or months with little or no income, having to wade through your own bookkeeping, and limited or zero access to employment benefits like paid sick leave or a maternity allowance.

Another sticking point: the cost of setting up your company in the first place. Can you afford to rent a business premise or shop front, as well as the costs associated with it (electricity bills and internet access)? What about creating your own website from scratch? And advertising? Equipment? Staff?

Fair enough, some of these might not be necessary if you're aiming to start small. But you’ll need to think about how much of your own cash you can afford to invest at the start and, if that’s not enough, look for investment or secure a business loan.

How do I know if my business idea is strong enough?

Whether you’re looking to launch a brand new product or service, or simply offering a cheaper or better version of one that’s already out there, you’ll need to be clear in your head exactly what benefit you’re bringing and who your customers will be. You don’t have to settle on just one idea straightaway – jot down all the ones whizzing through your mind and compare them on paper to see which ones stack up best in terms of viability.

You should ask yourself first if there’s a market for the business, product or service and, crucially, whether this is big enough to keep you afloat. Check out competitors too. If you’re looking to set up a cupcake business, for example, and there are already a string of bakeries in your town, what’s going to set you apart? Will you be cheaper? Offer bespoke cakes for special occasions? Can you host workshops to give amateur bakers a chance to hone their skills while having fun? Basically, you’ll need to be sure what the existing market looks like and how your company will fit into it.

And then consider customers. Is there already a demand for your goods or services or will you have to spend money and effort educating them first? Having some sort of idea what your average client will look like (demographic, whether they can be online, anywhere in the world, or must necessarily be local etc) is also worth thinking about.

How do I write a business plan?

This is the crucial first step when setting up your own business, as it clarifies how you’ll turn an ‘idea’ into a viable, money-making initiative, not just to make it clearer in your own head but so that outside parties, such as investors, can better understand what you’re trying to achieve.

• Start with a short overview of what your business is and what you are trying to do in no more than two paragraphs.
• Next, outline your business model and identify the products, services and solutions you provide.
• Customers, market and competition comes next. Try to present a clear idea of your ideal client, the market for your product, service or solution and how you’re going to stand out from the competition (and where that competition’s coming from).
• Now you're ready to detail your marketing and sales plans, which can be helpfully distilled into five ‘Ps’: pricing (how will you price the end product?), positioning (how does it fit into the market?), promotion (so, the ways you’ll attract and communicate with customers), profit (how much you expect to make per item/service sold) and place (what are your sales outlets?).
• And then you’re onto finances (current) and projections for the business moving forward. Be realistic – and be prepared to back these figures up. The former should include the overall costs of setting up your business, including to make or buy products, distribution and marketing costs, and fixed and variable overheads.
• Finally, write a short section about you (plus any others in your team) detailing why your experience and expertise mean you’re well suited to make the business a success. And provide contact details so a reader can easily get in touch.
  
  

If this all sounds slightly complicated, be reassured there are lots of templates available to small business owners online, not just for writing your business plan but also to help with invoicing, business letterheads, company newsletters etc.

What type of business loan should I get?

Once you’ve created your business plan, you’ll be in a better position to decide if you have enough money to set up your company and to survive long enough to break even. According to Freshbooks, in the US, most small businesses take at least two to three years to become profitable. However, this will depend on the type of business you are creating and whether you already have customers lined up to buy your products or services.

When considering whether or not to get a loan, it’s important to remember you are making a financial commitment. And do your research first, comparing a variety of loans to find the one best suited to your needs. For example, some lenders may not allow you to take out a personal loan to start a business, while a payday loan (or short term loan) would be unsuitable in this context too.

You’ll also need to decide between secured and unsecured business loans. The former means that any money borrowed is secured with assets (property, equipment, etc). With an unsecured loan no assets are offered as security.

Consider start-up loans too, which are specially designed for new business ventures. You’ll be able find start-up business loans online, as well as business grants. You will most likely be asked for a business plan, which should demonstrate that your start-up can afford repayments. A cash flow forecast will likely be requested by lenders too.

Finally, don’t be afraid to cast your net further afield. You may be able to get a small grant from your local council or a government-backed loan scheme.

What’s a sole trader?

In terms of structure, there are lots of different kinds of self-employed businesses, from partnerships to private limited companies. For the sake of simplicity, however, in this blog we’re mainly talking to people looking to register as a ‘sole trader’ – the simplest of the lot. It means you’ll be running your own business as an individual, will keep any after-tax profits, and be personally responsible for any losses your business makes. Examples of sole traders could include taxi drivers or carpenters, childminders or hairdressers. 

To become a sole trader, you’ll need to register as self-employed with HM Revenue & Customs (HMRC) and file a tax return every year. You pay tax and National Insurance on your self-employed earnings in arrears, which means any tax you owe on money earned in the 2021/22 tax year is not due until January 2023. HMRC has a calculator to help you budget for this. In addition, if your turnover is greater than £85,000 you must register for VAT.

As a sole trader, what you choose to call your business is up to you. Some people trade under their own names, or you can come up with something different as long as it does not include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’. Nor can the name be the same as an existing trade mark, contain a sensitive word or expression, or suggest a connection with government or local authorities, unless you get permission first.

Do I need a business bank account?

While it’s not a legal requirement of being a sole trader or in a partnership, a business bank account is certainly recommended if you want to keep your company and personal finances separate – and just to look more professional when invoicing clients. And then there’s the fact some banks simply don’t like you mixing business with pleasure, as it were – if you check the smallprint of your personal bank account documents, you might find a stipulation that the account should be for personal use only.

Another advantage of a business bank account is that it makes things much easier when it comes to filling in your tax return. When personal costs are mixed up with business costs because you use one bank account for both, it can be a real chore totting up the allowable expenses (travel costs and office costs, for example) to calculate your taxable profit.

Which business bank accounts are best?

This depends on how you’ll use your account. All the traditional banks offer business bank accounts, but challenger banks, or online-only bank accounts, are also becoming an increasingly popular choice for start-ups. Many of these are ‘proper banks’ (rather than simply e-money providers), so you don’t need to worry about how secure the set-up is. With Starling and Monzo, two of the most well known online-only bank accounts, your cash is protected up to £85,000 by the FSCS.

The former offers a sole trader account to existing Starling personal current account holders, and you can integrate this with your accounting software. It also has a ‘business marketplace’, allowing you to download and connect other apps with your Starling app. 

If you think you’ll struggle with the admin side of running your own company, you could buy the business toolkit feature for £7 a month to help with invoicing and expenses and to provide real-time estimate of the money you need to keep aside for your Self Assessment tax bill.

Both Monzo and Starling business bank accounts are free (at least for the most basic options), but expect to pay for things like cash deposits and enhanced business features.

Another option is an e-money provider. We mentioned them briefly above in the context of your money not being FSCS protected, but many, like Natwest’s ‘digital-first’ product Mettle, do still keep it safe in a separate account. Some are targeted at sole traders, and have neat invoicing and accounting features, and can integrate with business software like Xero and FreeAgent. A few go one step further. ANNA and Tide have great tools for tracking your expenses, for example: when you make a payment with your debit card, the app prompts you to take a snapshot of the receipt. Not only are your expenses then automatically categorised and stored, you don’t have to worry about losing receipts!

Remember, every small business will have slightly different requirements so it’s always best to do your research before opening a new account to find the one best suited to your needs. You can compare business bank accounts on our website to help narrow down your choice.

What about a licence, permits or insurance?

If you plan to play music, trade in the street or sell food, you’ll need the correct paperwork in place in the form of a licence. The gov.uk site should be able to help you here. There are also rules to follow if you sell goods online, buy or sell goods from abroad or store or use personal information. Again, consult the gov.uk site.

In terms of insurance, business cover will help protect you against everyday risks, including if your stock gets damaged or you incur legal costs. It can also give prospective customers confidence that you’re a trustworthy enterprise. And, of course, business insurance is often required by law. If you have staff, for example, it’s imperative you have employers’ liability insurance so you can compensate employees who are injured or become ill through work. And if your business uses vehicles, you’re legally obliged to have commercial motor insurance. Meanwhile, some jobs will need professional indemnity insurance as a stipulation of their professional bodies or regulators.

While other insurance is optional, it can be incredibly useful. Even if you're working from home, your home insurance may not cover items of stock, computers, or customers visiting your premises. The main ones to consider are:

• commercial property insurance, to meet the cost of repairing or rebuilding your business premises, or replacing stock or equipment.
• liability insurance, in the event of compensation claims following fault or negligence brought against you or your business by clients, customers, shareholders, investors, or members of the public
• cyber insurance, for losses relating to damage to, or loss of information from, IT systems and networks.

Finally, think about yourself, and not just the business bits and pieces. With no sickness benefits from your employer any more, a personal insurance policy, like income protection, could cover you if you become too ill to work.

Will I need to pay business rates?

If you run a home business, you’ll need to check if you have to pay business rates. You may also need permission from your mortgage provider or landlord and local council, for example if you’re expecting lots of customers or deliveries, or if you want to advertise outside your house.

Business rates are charged on most non-domestic properties, like shops and offices and holiday rental homes. You’ll be sent a business rates bill by your local council in February or March each year, for the following tax year.

Should I get an accountant?

This depends on how confident you feel managing your finances and tax affairs. The advantage of having one is that they can provide advice on tax planning and offsetting expenses against income – but make sure they’re a member of a relevant trade body (e.g. the Institute of Financial Accountants or the Institute of Chartered Accountants in England and Wales).

For many small businesses, however, the financial situation should be straightforward enough to manage on your own. You’ll have to keep good records though, including receipts, bank statements, invoices and till rolls. This will not only allow you to keep track of what money’s coming in from customers, but also your outgoings on business-related expenses. You’ll need to keep these for five years after submitting a tax return, although you won’t actually be required to send them off with your return.

How do I get my company known?

These days you might struggle to get your business off the ground without an online presence: a website is the bare minimum. If you’re looking to drive a lot of sales from your website, consider optimising it to pick up visitors from search engines (like Google and Yahoo). There are lots of helpful guides online about Search Engine Optimisation (SEO), and with no direct costs it’s essentially ‘free’ marketing (although it does take time and effort to get your strategy right).

Social media is another great (and free!) way to reach an audience for a small business – not just currently, while Covid is restricting most of us to our homes, but in the longer term too. If you’re not already on Facebook, Twitter or Instagram, consider setting up an account to publicise your brand, but be aware that not all platforms will work for every business. Lifestyle-related businesses, for example if you’re thinking of becoming a self-employed interior designer, lend themselves well to pictorial platforms like Instagram, where you can showcase your latest projects. If you're an IT consultant, however, getting on LinkedIn or working on word of mouth referrals might be a better match.

And don’t forget good old-fashioned printed marketing materials – everything from flyers and business cards to branded pens and mugs. Before rushing into any rash order of 5,000 t-shirts with your logo on, however, consider how your customers will use them and how it relates to your business. If you’re opening a bookshop for example, a neat way to stay in customers’ minds is to present your business card as a bookmark. When they reach the last page, they won’t have to look far for the website details to order their next read from you online, or include your opening hours if you want to direct them back to the shop itself.

Conclusion

Over the last few months we’ve tried to give a good overview of how to stay afloat financially when you’re looking for a job, ways to boost your chances of getting hired, and other options to earn an income. There are plenty more resources online covering all these strands, but this series should, at least, give you the basic toolkit to get back into work in no time at all, and keep your bank balance in the black meanwhile. Best of luck.