Think Hard Before You Start a Business - TheStreet

Think Hard Before You Start a Business

The economy is improving for small businesses, but loans to cover start-up costs are still hard to get.
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CHICAGO (TheStreet) -- After years of layoffs and salary freezes, many overloaded workers are getting restless. Now that the economy is improving, they're wondering whether it might be safe to take the ultimate risk: opening their own businesses.

Starting a new venture is always risky, regardless of the economy. While the financial crisis prevented many would-be entrepreneurs from setting up shop, many unemployed workers had to create their own opportunities to pay their bills. There's even a term for it: "necessity entrepreneurship."

If your new business isn't necessary, is it worth the risk? That depends, says Jerome Osteryoung, a professor of entrepreneurship at Florida State University.

Avatars That Help Businesses (Forbes)

"The critical question is whether there's a reasonable demand for your product or services," he says. "If you're in construction, or any industry that is shrinking or flat, it's not a good time."

If you have expertise in a field with solid growth potential, such as clean energy or eldercare, this could be a great time to start your own firm. "Rental rates for commercial space are the lowest they've been in a while, and you have record low interest rates for borrowing," Osteryoung says.

You'll also face less competition because potential rivals with similar expertise might be too nervous to take the leap.

There's no denying that leaders who are willing to take the risk now can end up big winners. Research by Gary Beach, publisher emeritus of CIO magazine, found that 70% of the top 10

Fortune

500 companies launched during a recession.

FedEx

(FDX) - Get Report

opened during the oil crisis of 1973 and

Revlon

(REV) - Get Report

was founded during the Great Depression in 1932.

When you've confirmed that there's a market for your product or service, the next step is to find the resources to make it happen. While potential business owners often assume they'll get a bank loan to fund start-up costs, getting approved is tougher than ever. A recent report by the National Federation of Independent Businesses said the borrower's credit score decides whether the company will receive a loan. If you don't have a high credit score and rock-solid financial history, your chances of borrowing are slim.

Even if you have good credit, Osteryoung says it's wise to avoid borrowing. Instead, entrepreneurs should try to raise capital from friends, family and potential business partners.

"Every new business is risky," he says. "Why add to the risk by adding debt? It imposes a fixed payment obligation on a business, when new businesses and their revenue are volatile by nature."

Before entrepreneurs approach potential investors, they should perfect their sales pitches and business plans.

For guidance, aspiring business owners should check out the Web site of

SCORE

, an organization that helps retired executives mentor small-business owners. Their Web site offers free online workshops on topics such as developing a business plan. There's also a step-by-step guide to assessing whether you can afford to start a business. For more specific questions, you can request a mentor in your field.

The

Association of Small Business Development Centers

also offers consulting and training through its network of 1,000 sites.

Don't forget the final and most important question: Is this something you want to do? Entrepreneurship is a more than a full-time job. To be successful, you have to love what you're doing because it will take time away from your family and social life. You'll put in late nights and make sacrifices to stay afloat.

If that sounds like a fair payoff, you're ready to make the leap.

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Reported by Elizabeth Blackwell in Chicago

.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.