BEST WAYS TO START A BUSINESS NOW EVEN IN THE FAVORABLE CLIMATE WE FORESEE FOR SMALL BUSINESS IN '96, YOU'LL NEED EVERY EDGE TO GET AHEAD.
By JAN ALEXANDER

(MONEY Magazine) – FROM THE COMFORTABLE VANTAGE POINT OF LATE '95 here's a fearless prediction: Next year may be the best time this decade to launch a small business. Why? A cluster of positive factors seems to be coalescing now:

The economy, slowing from '95's 3% pace, will stay on a growth track averaging 2.5%, says MONEY's chief forecaster, Michael Sivy.

Inflation, adds Sivy, will stay low, averaging 3% or less. That will keep a lid on overhead and other costs.

The increasing availability of affordable yet sophisticated small-office/home-office (SOHO) technology, such as heavy-duty data storage equipment retailing for less than $200, will further reduce launch costs for a host of businesses ranging from accounting to graphic-design firms. Then too, hundreds of so-called small business incubators, frequently sponsored by government agencies, universities and some private firms, now provide cheap office space, equipment and administrative services to start-ups.

Finally, capital looks plentiful, despite congressional efforts to curtail the lending power of the Small Business Administration. The SBA anticipates guaranteeing a record $12.6 billion in small business loans next year. (For information, call the SBA Small Business Answer Desk at 800-827-5722.) Better yet, says MONEY's Sivy, interest rates are likely to fall by nearly half a percentage point next year.

Get the picture? If not, maybe this will give you the courage you need to take the leap into business: Partly because overhead costs have stayed low for much of the decade, small business failures are down. In 1992, according to the SBA, fully 15% of that year's 650,000 start-ups went blooey within a year. For 1995 launches, the SBA estimates the comparable number will clock in at a mere 8%.

Not everyone, of course, is suited to start and run a business. For advice and guidance that will not only help you tell whether you have what it takes but will also give you tips to get going, check out How to Succeed on Your Own (Henry Holt & Co., $22.50). For the best odds of success in '96, follow these five steps:

1 FIND A HOT FIELD

Yesterday's good idea can be today's turkey for a start-up entrepreneur, so steer clear of saturated markets such as gourmet coffee beans, imported crafts and jewelry, and bed-and-breakfast inns. Instead, investigate fast-growing niches like these:

Business-to-business services. Since 1992, streamlined companies have saved money by outsourcing functions like employee-benefits administration, mailroom duties and sales. That trend has driven up the demand for a wide range of consultants whose ranks will increase 20% to 25% by the year 2000, say Paul and Sarah Edwards, Santa Monica, Calif. authors of The Best Home Businesses for the '90s (Tarcher/Putnam, $12.95). In particular, demand will be high for technical trainers, new-product marketers, videoconference planners, and individuals expert in complying with government and environmental regulations. (For more information on starting a consulting business, call the Institute of Management Consultants at 212-697-8262.)

Health care. Cost-containment measures have forced the closing of more than 15 hospitals nationwide over the past two years. Dozens more have cut their payrolls to get lean. Result: a vast need for independent providers of hospital services, such as medical-claims processors and home health-care professionals. Realizing that need prompted nurse Julie Huckaby, 35, C.P.A. Karen Bairaktaris, 32, and former patient-benefits administrator Pat Limbaugh, 41, to take the entrepreneurial plunge. Last July, the tenacious trio launched Heartline Infusion of Chattanooga. Their firm contracts nurses to administer intravenous drugs to homebound patients. Anticipated earnings for 1996: $200,000.

Specialty gourmet foods. Stop the presses! Reliable sources say Americans will continue to eat in 1996--and McDonald's, Burger King and Pizza Hut won't be the only fare of choice. Looking for more exotic palate pleasers, baby boomers crave gourmet goodies at premium prices. According to industry reports, specialty food is a $25 billion market that is growing 7% a year. Hot products: flavored beverages, salsa, low-fat snack foods and specialty teas. To find out more about fancy-food trade shows and supplying specialty items to gourmet food stores and restaurants, call the National Association for the Specialty Food Trade at 212-482-6440.

Technology. Out-of-work marketing pros, especially those with any flair for selling new technologies, need not despair. "Universities with large research-and-development facilities are full of scientists and technical people looking for individuals with marketing experience to sell their inventions," says Pete Collins, director of entrepreneurial advisory services at Coopers & Lybrand, a New York City Big Six accounting firm. To find out how to tap into this lucrative market, call the Association of University Technology Managers at 203-845-9015. AUTM provides assistance to members looking to produce, license or patent their inventions. Alternatively, you could create a business by filling old needs with new technology. Take Shawn Marcell, 34, of Ardmore, Pa. In 1993, the former sales and marketing vice president for a biotech firm came up with this moneymaking notion: a specialized video device that could help transit officials monitor passenger flow and deter crime by capturing vandals on a computerized videodisk. Not knowing the first thing about video cameras, he turned to an engineer to make a prototype. Now his two-year-old firm, Prima Facie, markets video black boxes for use as security devices on transit vehicles in Houston, Philadelphia, Delaware and a suburb of Toronto. After start-up costs of $100,000 for patent applications and prototype technology, Prima Facie now has 10 employees and, Marcell says, should do just under $1 million in sales next year.

Franchising. Drive down practically any commercial highway today, and you won't be surprised to learn that a new franchise opens somewhere in the U.S. every eight minutes of every business day. According to franchise researchers at FranData (202-659-8640), there are 30 home-based franchises that you can start for less than $20,000. According to the International Franchise Association in Washington, D.C. (202-628-8000), the hottest franchises these days include those centered on home repair, organizing space in homes and offices, and teaching computer science to kids. Caution: When shopping for a franchise, look for a sponsoring company that provides quality goods or services, has a topnotch reputation and offers thorough training and ongoing franchise support.

2 BE CREATIVE TO RAISE CAPITAL

Most cash-hungry entrepreneurs turn to family, friends and credit cards as they learn firsthand that banks and investors are looking for some type of track record before they grant loans. Marcell started Prima Facie that way, with about $100,000 that was gathered mostly in $10,000 chunks from relatives. To attract seed money from such sources, show them a business plan. Have your attorney develop formal agreements for lenders and investors that spell out repayment terms on loans and what investors might expect in future returns, says Clark Callahan, director of the Wharton Small Business Development Center at the University of Pennsylvania. Tip: If you can possibly do so, avoid using credit cards as a financing tool. At average interest rates of 18%, they just don't cut it.

3 THINK STRATEGICALLY WHEN STAFFING UP

Before you hire full-time staff, consider whether you could get the job done more cheaply through independent contracting arrangements. One advantage: You don't pay payroll taxes for such workers. But avoid getting caught in a tax nightmare. Be sure to clarify in writing that you have a work-for-hire arrangement with each of your freelancers, advises New York City attorney Steven Mitchell Sack, author of From Hiring to Firing: The Legal Survival Guide for Employers in the '90s (Legal Strategies, $33.95; 800-255-2665).

If you prefer the security of hiring full-time staffers, consider whether you can cut your out-of-pocket cash expenses--and sweeten pay packages--by offering selected employees a stake in your firm. But don't be too generous. It's best to offer small stakes at first, then pay key people in shares as they prove their worth.

4 CONSIDER A HOME-BASED BIZ OR AN OFFICE IN A BUSINESS INCUBATOR

Link Resources, a New York City market research firm, estimates that by 1996, 14 million Americans will join vitamin seller Craig Bryan (pictured on page 102) of Land O'Lakes, Fla. to become full-time, self-employed home-based workers. That's up from 11 million only five years ago. The types of businesses that work best at home are those that you can administer from your friendly confines but often require you to visit clients to deliver goods or perform services. Examples: consulting and janitorial services. Before you get started, though, check local regulations. Zoning laws governing home-based business vary by city, and a registration fee may be required. (For more information on starting a home-based business, call the National Association of Home Based Businesses at 410-363-3698.)

As an alternative, consider establishing your hatchling enterprise in a small business incubator. There are currently about 500 such centers across the country, housing more than 8,000 small companies. For information about incubators in your area, contact the National Business Incubation Association (614-593-4331). These office complexes are often located in strip malls and industrial centers. For a price that usually runs about half the going market rate, an incubator will provide you with space, a telephone, equipment, administrative support and a conference room.

5 BE A SHREWD TECHNOLOGY SHOPPER

No, you don't need every flashy new gizmo that catches your eye. But these days even the smallest of businesses can benefit from wise use of today's best technologies--from modems to tap into on-line databases, to laptops that travel with you to meetings with customers, to fax machines that do everything but balance your books. Don't stint on helpful hardware. Similarly, you can increasingly rely on low-cost software such as Intuit's QuickBooks ($99) or Peachtree First Accounting ($50) to balance your books, cutting accounting costs. Another worthy product for entrepreneurs with small offices and home-based firms: Microsoft Office ($500), which includes word-processing, spreadsheet and database programs. Practically the only thing it doesn't provide is a readymade client list--but then what would be left for you to do?