In today’s increasingly digital world, you can visit a museum, host a meeting, and get groceries without leaving the comfort of your own home. It should come as no surprise that it’s also possible to start a business online — without the need for a physical storefront or even professional office space. Here’s everything you need to know about how to open a small business online.
Most small businesses use a combination of both physical and online presence to get off the ground. However, starting a business entirely online has several perks including reduced start-up costs and the ability to work anywhere, anytime. However, online businesses also have unique challenges including increased competition and the need for more advanced digital marketing techniques to attract customers.
Read on to learn more about the most common online business models and the steps you must take to be successful in the digital world.
The 3 Most Common Online Business Models
Almost any kind of business can be started and run online, from cuisine to consulting. However, most online businesses usually follow one of following three common business models:
Selling a physical product online
This entails buying or making physical goods that are sold via an ecommerce website or on a third-party website, such as Amazon. A buyer uses the website to research and buy a product that the seller then must ship. This model requires the seller to act as a warehouse to store goods waiting to be sold, which can be challenging in small spaces. A strong understanding of the demand for products can help ensure space isn’t wasted on items that don’t sell as quickly.
This is an alternative to making and selling your own products. You work with a manufacturer that offers drop shipping. You still do the marketing to persuade potential buyers to purchase the product, then send any orders to the manufacturer, who then ships the product directly from their warehouse. The online business owner is required to pay a wholesale price for the item, plus a “dropship fee,” which can vary from $2 to $5 per item. Drop shipping is becoming a popular model for those who want to operate a business online without having to store or ship items themselves.
Selling services online
This model is ideal for sellers who have professional expertise they can offer to buyers, such as consulting or coaching services. Selling services online is usually done in one of two ways: the website is used to initiate the sale, but services are rendered in-person; or the entire transaction — from sale to services provided — is done virtually. The first method is common for health care or repair services, where buyers use a website to find a professional but the service itself is delivered in-person. The second model is more common for coaching or consulting services, such as web marketing or graphic design, where the service is sold and delivered online.
Selling informational products online
This model pertains to the selling of educational materials, such as ebooks or training courses. Thanks to digital transformation, the majority of informational products can be sold and delivered virtually. Years ago, a printed book would have to be stored and shipped, or trained individuals would need to be available to present material to an audience. Today this material can all be delivered to recipients virtually. This offers the ability for exponential growth without being limited by storage space or human resources.
7 Steps to Start a Business Online
While it may seem that starting an online business would differ drastically from brick-and-mortar stores, the process to setup the business is still the same. However, differences come into play when you’re ready to begin marketing your products/services to attract new buyers. Below are the steps aspiring online business owners should take to setup and promote their business online:
Determine Your Business Model
Determine what your online business will sell. Will you offer physical products that you’ll ship to buyers, or do you have processional expertise you can offer to clients as a consultant or coach? As you make this decision, it’s also important to consider your competition. If you can find a need for a product or service that isn’t currently being met by other online businesses, you’re chances of success will be much higher.
Choose a Business Structure
Just like any other business, you’ll need to decide how to operate your online company by incorporating as a business entity. This will determine how your business will be taxed, how much paperwork you’ll be required to do, and any personal liability you’ll face. If you’re planning run your business on your own, a sole proprietorship may fit your needs. However, you can also choose from a partnership (for two or more owners), a limited liability company (LLC), or a corporation. Learn more about selecting the right business structure.
Pick a Business Name
While you can operate your business under your own name (common for sole proprietorships), you may be better off using a unique name for an online business. Not only is a unique business name required if you operate as an LLC or corporation, but there’s also less chance that the domain name (or internet address) will already be in use. Once you come up with a few names to choose from, do a Google search to ensure it doesn’t already exist. The U.S. Patent & Trademark Office website also allows you to search for trademarked business names.
Complete Business Filings and License Paperwork
Even if your business will be run online, you’ll still need to file the necessary paperwork to run your business legally. This includes registering for a tax identification number (known as an Employer Identification Number or EIN). Depending on the industry you’re in, you may need to obtain a federal business license with the appropriate agency, and you may also need to register your business within any state and/or local jurisdictions you conduct business in. Visit local government websites to determine specific requirements for that location. If you plan to work out of your home, you’ll also need to check zoning requirements to ensure your plans won’t infringe on any local laws (this is especially true if you plan to have customers visit your home).
Build Your Website
For online businesses, their website is a sales tool that must represent the company in a clear and positive light. To setup your website, you’ll need to register your domain name, purchase web-hosting (usually offered through the same site where you registered your domain), and choose a platform to host your website, such as Wix or WordPress. Your website should be well formatted, and easy to use and comprehend, telling visitors how your product or service solves a problem, and establishing you as a credible source to offer a solution. Depending on your comfort-level, you might consider hiring professional graphic designers or copywriters to help you put your company’s best foot forward on the web.
Promote Your Business
This is where the real difference comes into play when operating a business online. Competition can be much fiercer online because you’re challenging companies across the country, and in some cases, the world. While it’s still important to market your business locally and through word-of-mouth, you should also want to invest in digital marketing tactics such as search engine optimization (SEO) and pay-per-click advertising, which can both help a website appear at the top of search results when a customer searches for relevant keywords.
Be Aware of Tax Responsibilities
Online businesses are usually on the hook for collecting and paying sales tax, both in the state they reside in, and in some cases, the states they sell into. It’s advisable to work with a tax professional who can provide advice on how and when you’ll need to pay taxes.
Financing an Online Business
The cost to start and open an online business can vary drastically, from a few hundred dollars to several thousand. Even though online businesses usually have lower start-up costs, aspiring owners may still require financing to pay for making/shipping their products, shipping and storing them, and setting up their office.
In most cases, the same financing methods used for brick-and-mortar businesses are also relevant for online businesses. Some useful business financing methods include:
SBA (Small Business Administration) Loans
SBA loans are one of the most common methods for funding a business as they offer low interest rates and long repayment terms. However, if you need less than $50,000 in funding, it can be difficult to find a bank that will lend to do since lesser loan amounts are often not as profitable. To increase your chances of approval, you can take steps to increase your credit score, increase your down payment, and strengthen your resume by increasing your experience in business management.
401(k) Business Financing
This option, also known as Rollovers for Business Start-ups or ROBS, is ideal for those who don’t want to take on debt to start their business. It allows business owners to leverage funds in their 401(k), IRA, or other pre-tax retirement accounts to use as business capital — without triggering tax penalties or early withdrawal fees. Providers, such as Guidant, suggest that you roll over at least $50,000 for the transaction to be financially viable, so if you don’t need that much funding, another method may work better for you.
Similar to credit cards, this option gives borrowers the ability to use credit and repay at will, making it ideal for one-time purchases as you get your online business up-and-running. Unsecured loans don’t require any personal property to qualify, but they do require credit scores of at least 690. It’s also important to note that interest rates on unsecured loans usually increase significantly after the lower introductory period expires, so it’s wise to purchase and payback big ticket items before that time.
As a small business financing provider, Guidant Financial takes pride in educating you on your funding options so you can make the best choice for you and your business. To learn more about which method may be right for you, take our financing assessment to get started.
Whether you’re internet-savvy or just beginning to explore cyberspace, starting an online business can be a lower-cost alternative to a brick-and-mortar company that still offers entrepreneurs the ability to be their own boss and take control of their financial future. By understanding your options and the steps you’ll need to take to be successful, you can set a strong foundation for yourself and your online business up for profitability.