Thinking about starting a side hustle? Perhaps you imagine quitting your job one day to take your business full time? Wondering what things you should be focusing on upfront? There are several foundational things you need to have in place in order to establish a successful side hustle. Let's discuss them below.
P.S. I'll be using the words side hustle and business interchangeably throughout this article!
1. Create a good business plan for your side hustle
If you’re in the process of starting a side hustle and do not have a business plan, you need to create one now. A business plan is essentially your roadmap for your side hustle. You can't achieve success without some type of plan! Keep in mind that your business plan doesn't need to be 100 pages long. Instead, it needs to focus on key things to help you build a successful business.
Your initial business plan should be fluid and will possibly change—a lot! As you put your ideas on paper and as your business comes to life, you may start to realize other factors. This will help you better determine what you want and don't want in your business, or come up with completely new ideas.
Below are some topics you should include and some questions to get you thinking as you create your business plan.
The executive summary
Your executive summary basically outlines what your business is about, and what problem you are solving with the product or service you’re offering. This section, usually a one-pager, will be easier to complete once you've built out the main sections of your business plan highlighted below.
Your target audience and avatar
When it comes to starting your side hustle, you need to know who you'll be selling to. Here, you’ll define who your target audience is. This includes identifying key demographics about them, such as where they’re located, their age, their income and why they would be interested in your business. You should also have some idea of who your ideal client is, and how you will attract them.
Your operating model
Having a clear operating model helps you understand and layout HOW exactly you intend to deliver value with your products and services. It will also help with determining the type of experience you plan to provide your ideal customer.
Start by asking yourself: Are my products packaged in a way that aligns with the experience I want my customers to have? Is my website in line with my brand? Once your operating model is fine-tuned and running, it will allow you to scale your side hustle because you'll have well-established processes in place on how to run your business.
The products and services you'll offer
What products and services do you plan on offering? Are they in line with the problem your business will be solving? It’s a good idea to sketch out some thoughts on how you will price your products or services. You'll also want to consider how you’ll be selling them.
Ahh, competition. Everyone hates it, but everyone needs it! No business plan is complete without some rough ideas about your competition. Where is your competition located? What are the strengths and weaknesses of their offering? And of course, how can you differentiate yourself from them and make your offering better?
Start-up costs and financing
We’ll cover this in more detail below, but in short, this is a critical part of your business plan and something you won’t want to overlook. Here, you’ll outline your initial start-up costs, registration fees, branding costs, website development costs, etc. Then, consider your potential sources of funding and whether or not you’ll need investors.
Cash Flow and budget
Also called your working capital, your cash flow is how much you need to keep your side hustle running day-to-day. These costs need to be laid out as part of your operating expenses. They will give you a baseline of how much you'll need at a minimum each month to keep your business going.
And of course, you’ll need a plan for staying on track with your cash flow. That’s where your business budget comes into play. Having a solid business budget is essential to the success of your business, allowing you to manage your business finances properly and stay on top of your expenses.
Revenues and profit forecasting
You can't turn a profit if you don't have a solid revenue stream. In your business plan, you should outline the products and services you plan to sell. You'll want to outline exactly how you will communicate those products and services to your potential customers.
It also means fine-tuning your revenue stream as you learn what's working best (or what isn't). Once you have a solid revenue stream in place, it becomes so much easier to forecast your business earnings and profitability.
Also, take a look at potential profits. Becoming profitable is great, but ideally, you want to have a clear understanding of exactly how much profit you are generating on each product or service you offer. You can then perform assessments to determine how to maximize your profitability by reducing costs or competitively increasing your prices (or doing a combination of both).
2. Determine what type of business entity to set up
Before you start providing any services or earning any money with your side hustle, you need to ensure it is set up correctly both legally and tax-wise. This is where the structure of your business comes into play.
There are different types of business structures to choose from that are recognized by the IRS. They include Sole Proprietorship, Partnership, Limited Liability Company (LLC), or a Corporation. Be sure to talk to your accountant about the tax implications of each of these entities.
The different business entities include:
In this business structure, you run the business alone and are personally responsible for all of the related liabilities.
As the name implies, in a partnership you run the business with a partner or multiple partners. The business is managed based on the agreement you set up. You and your business partner(s) are personally responsible for all of the related liabilities.
Limited Liability Company (LLC)
An LLC gives you limited liability (similar to a corporation), which means you have no personal liability for business debts and claims. You'll also have flexibility in your management structure and ownership similar to a partnership. LLC owners are called members.
Corporation (S or C Corp)
Here, your business is a separate legal entity and only the entity itself is legally responsible for any liabilities. Owners are called shareholders. There are two different types of corporations, C corporation, and S corporation and the main difference is the way each entity is taxed.
3. Leverage free resources when starting your side hustle
Below are two invaluable resources that will you most likely need as you begin your small business journey. These resources go into a lot of detail regarding the business structures mentioned above. They include the pros and cons as well as the specific steps you need to take to set up your business under these structures.
One last thing. You’ll also need to apply for a business tax ID or Employer Identification Number (EIN) on the IRS website if you are required to do so based on the business structure you've selected. Your EIN is like your social security number, but for your business. It will tie into your business taxes, hiring employees, and other important and required legalities.
4. Decide what you will call your side-hustle
The next thing you need to do to start operating is deciding on a business name (if you haven't already).
FYI—Your business name is kind of a big deal! It will reflect your brand identity and be the first introduction the world has to your new venture. But before you decide on a business name, here are a few things to think about:
- Will your business name appeal to your demographic?
- How unique is it?
- Is the web domain available?
- Is your business name under someone else's trademark?
Once you've answered these questions you can go ahead and register your business with your respective state.
5. Consider setting up business credit
Having a credit profile for your side hustle allows you to maintain a credit history for your business. This business credit profile is separate from your personal credit profile. This means none of your personal credit details will be tied to your business credit inquiries, approvals, or financing. Separate business credit also allows there to be a clear separation of assets between the business owner's personal assets and the assets that are tied to the business itself.
A separate business profile also means that you can protect yourself from business identity theft. If your business credit is intertwined with your personal credit, you might not be aware of any theft. You can also monitor your business in a similar fashion to the way you would monitor your personal credit.
You want to make sure the credit bureaus, as well as your business creditors and vendors, are able to confirm your business information when you apply for financing or business with them. Below are 7 steps you need to take to properly set up your business credit:
Incorporate your business
This means setting up a corporation or an LLC (Limited Liability Company) to ensure your company is seen as a separate business entity. For businesses that are sole proprietorships and partnerships, the business is the same as the owner. So in order to have separate business credit, your business needs to be a corporation or LLC.
Obtain a FEIN
Also known as the Federal Employer Identification Number. This is the number you'll use for tax filings and business registration. You'll also need to provide this number to vendors you work with.
Open a business checking and savings accounts
You'll need to open business accounts in your registered business name. These are accounts are where you'll make your day-to-day business transactions.
Establish your business credit profile
Getting a business credit card that you use for business transactions can help you establish business credit. Working with vendors on net payment terms can also help establish your business credit profile. This is where you buy products and services from them and repay them within a specified period. These vendors then make reports to the credit bureaus with your on-time payments. The 3 major credit bureaus for business are Experian, Equifax, and Dun & Bradstreet.
Pay your bills on time
Not just on time but in full where possible to build your business credit score i.e. your Paydex Score.
5. Create a plan to obtain funding for your side hustle if you need
When starting a side hustle, one of the biggest roadblocks is being able to fund it. I touched on this above, but here I’ll outline the different types of funding you should consider:
Self-funding your business from savings should be your first resort. Funding your business yourself is beneficial because you don’t start your business off with debt.
If you have no money (or not enough) to put toward your business right away, use free and inexpensive resources to get set up. Start saving a little bit at a time for your business. Use a free blog platform, create a social media following, create a small sample set of products instead of a full-blown product line. Also, consider using free online scheduling and planning tools.
Self-funding means you may need to start small and follow a slower growth progression than if you had a ton of money, but it comes with a lot less risk.
Family and friends
The general rule is to keep friends and family separate from your business but I think it really depends! Your friends and family can be a great resource when it comes to funding. Why? Because you know and trust them, and you can work out low or zero-interest payments with them.
But be very careful not to ruin relationships with your friends and family due to miscommunications. Draw up contracts and make sure you are all in agreement with the contract terms.
Angel investors are typically high-net-worth investors who invest in your business. An angel investor is most likely looking for equity ownership in your business. Angels are more likely to invest in full time businesses vs side hustles.
The good news about getting a loan from a bank is that you don’t have to give up a share of your business in exchange for a loan. However, you’ll need to have good credit AND you’ll be taking on debt that you’ll have to pay back with interest over a specified time period.
Crowdfunding is basically pooling together a large number of people (usually online) to contribute to your product or service creation in exchange for a reward. The reward might be the first available offering of your product or some extra equity (shares/ownership in your business). Examples include kickstarter.com and fundable.com.
With crowdfunding, you don't have to give up any equity. You also won't have to go into debt to fund your business. However, it's important to know that when you raise money via crowdfunding, you will be paying the crowdfunding platform fees. These fees will be based on the total amount that you raise. In addition, there might also be major tax implications. Plus, you'll have to put in a ton of work (including marketing) to ensure you have a successful funding campaign.
Starting a side hustle successfully is possible!
Now you have all the specifics to set up your side hustle the right way. It's time to work on making it a massive success! It is possible with patience and hard work to build an incredibly successful side hustle. Perhaps it might even become your full-time hustle one day! To take the next steps to get your side hustle up and running, check out our completely FREE courses for first-time business owners!