MONEY

How to Start a Business Without Quitting Your Day Job

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Sarina Finkelstein (photo illustration)—Getty Images (2); Alamy (1)

And meet a bunch of folks who pulled it off.

Bill and Lauren Elward both held demanding full-time jobs when they started their online business, Castle Ink, a Greenlawn, N.Y.-based operation that sells remanufactured inkjet cartridges, laser toner, and ink refill kits. At that time in 2005, Bill was doing web analytics and marketing for the College Board and Lauren was a high school English teacher. Both were avid recyclers and wanted to build a business that tapped into that passion, but they weren’t willing to give up the security of steady paychecks.

Instead, they worked on the business at night and on weekends, sinking $5,000 from their savings into getting their website up and running. By 2007, with cash flow from the business picking up, Lauren, who was pregnant and on maternity leave, decided to quit her job.

Thanks to some smart decisions to outsource tasks such as order fulfillment, content development, and social media, she now is able to run the business in just a couple of hours a day and care for their two children, ages six and eight, without outside help. Bill, who now works for the finance site Bankrate, puts in about five hours a week on weekends or on the train ride home from work.

Their approach has paid off. Castle Ink broke $1 million in revenue in 2012, and even with the market for its cartridges softer today, it still brings in $250,000 to $500,000 in annual revenue, says Bill. Meanwhile the couple still reaps the stability and benefits from his job, such as his health benefits and 401(k).

Many would-be entrepreneurs fantasize about telling their bosses to shove it, but small business owners don’t always quit their day job right away. Research by Gallup in 2014 found that among startups under a year old that have fewer than five employees, only 38% of founders live on what they earn from the business. Fifty-four percent support themselves with another job during the first year. The picture changes later, when they are two to five years old. By that time, 51% make enough money in their business to rely on it as their main income and 44% are still relying on a day job.

Still, it’s not easy to start a business while remaining employed elsewhere. Beyond the issue of sheer stamina, entrepreneurs have to be careful not to jeopardize their current job. Here are some tips on how to navigate a launch while you’re still on someone else’s payroll.

Know what you’ve signed. Remember that sheaf of paperwork HR gave you when you started your job? Check your file cabinets and make sure you didn’t sign any agreements that prevent you from moonlighting or a non-compete agreement that will prevent you from launching your business for a certain period—and get legal advice if necessary. When in doubt, look to pivot a bit from the work you do now, since many employers will balk if you seem to be going after the same clients. “Try to find a different market than your current company is going after,” advises small-business consultant Crystal Stranger, president of 1st Tax in Honolulu and author of The Small Business Tax Guide.

Make the most of business travel. If you work long hours at your day job, it may be hard to squeeze in time to work on your startup when you finally get home. Cincinnati entrepreneur Bill Fish found a solution when he co-founded an online marketing company, Text Link Ads (now known as Matomy SEO) in 2001. At the time, he was spending every other week in Austin or Houston, Texas, for his job and had down time in the evenings to devote to his startup. “I was able to work on my business the vast majority of the time while I was traveling,” he says. “I was away from my fiancé and didn’t have anything else to do.”

The time he put in gave the company a running start, and the company grew to the point it was acquired by a private equity firm in 2006. Fish opted to stay on to run the company, and by the time he left in 2012, he says it hit $25M in annual revenue. Since then, he has moved on to another startup, ReputationManagement.com, an online guide where he is co-founder.

Turn your employer into a client. Finding clients before you quit your day job will help you build the cash flow you need to make the leap. Often, the best place to start is your current company. “I’ve had a lot of clients who are able to change their existing jobs to consulting and get paid as 1099 workers,” says Stranger.

Koel Thomae, founder of yogurt company Noosa in Bellvue, Colo., used a similar strategy. After leaving a position at former employer Izzy, a beverage maker, in 2008, the natural food industry veteran secured a consulting gig from a former colleague. Thomae, who had no children at the time, typically signed off from the consulting project at 5 p.m. and shifted to working on Noosa in the evening, often until 1 a.m.

“It allowed me to make enough money to contribute to my family but it also gave me the level of flexibility I needed,” Thomae says. “If I had to go to a meeting with the health department, it gave me this very flexible schedule to kind of do it all.”

By 2010, she had officially launched Noosa and it took off quickly, thanks to all of the advanced legwork she had done. Today, Noosa employs 100 people and the business is on track to generate more than $100 million in revenue, she says.

Sock away what you earn. If you’re making money on top of your salary, it’s tempting to splurge on extras, but Fish recommends banking all of it. At Text Ad Links, he and his partner lived on their earnings from their jobs while launching the business, which freed cash to reinvest in the startup. His advice: “Prepare not to take a single dime out of the business for 12 months,” Fish says.

Greg Van Ullen used a similar approach at OMilk, a Brooklyn, N.Y.-based maker of dairy-free milk that he co-founded with his wife Julie in 2011 and that today is sold in stores such Whole Foods in the Northeast. At the time he was doing online marketing for the charity Smile Train. After introducing the product at a local flea market and seeing immediate demand, they launched a home delivery service. For the first five months, Van Ullen did the deliveries himself but found it taxing to juggle with his job—in part because the milk last only eight days. “I was losing my mind,” he says.

Finally, he realized it was time to quit. “In my own situation it was easy to make the call because we didn’t have enough time to actually produce our product to meet the demand—which is a really good situation to be in,” he says. “It let me know that if I made this leap and did it full time, I would be able to sell it. It made me feel a lot safer.”

That’s not usually a how entrepreneurs describe the startup experience, but as his experience shows, living on the edge isn’t the only way to launch a successful business.

Read next: ‘How Not to Go Broke When Starting Your Own Business

MONEY Small Business Administration

Small Business Loan Program Halted as Demand Exceeds Cap

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SBA program saw stronger-than-anticipated demand

The U.S. Small Business Administration hit the budget limit set by Congress for its main loan guarantee program on Thursday, forcing it to halt the funding of new loans with over two months left in the fiscal year.

Facing this news, small businesses will have to wait until the start of the next fiscal year (Oct. 1), or wait to see if Congress decides to raise the program’s budget limit of $18.75 billion.

The loans in question — 7(a) loans — provide businesses with money to purchase new equipment, real estate, and even provide money to pay operational expenses and cover short-term working capital needs.

SBA spokesman Miguel Ayala told Reuters that the agency’s lending capacity for fiscal 2015 was exceeded by stronger-than-anticipated demand for the government-guaranteed 7(a) program loans made by banks to small businesses.

According to the AP, bills attempting to raise the program budget “have been introduced by lawmakers including Senate Small Business & Entrepreneurship Committee Chairman David Vitter, R-La., and Rep. Nydia Velazquez, D-N.Y., the most senior Democrat on the House Small Business Committee, and the committee’s chair, Rep. Steve Chabot, R-Ohio.”

If Congress doesn’t pass a bill soon, however, prospects of having the budget raised look dim.

MONEY Debt

How Etsy Helped Me Pay Off $20,000 in Debt

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Hero Images—Getty Images

Nancy Nemeth used half the money she made on Etsy to fund her sewing business. The other half went to pay down her debt.

Their marriage had a less-than-ideal start. She had $20,000 in debt. He was about to lose his home, and the bank wouldn’t negotiate. He also had a student loan, a car loan and some credit card debt. When she moved to Cleveland to be with him, she’d be unemployed. He’d have to work overtime as a truck driver just to put a few hundred dollars toward paying down the debt.

But Nancy and Dan Nemeth — both 49 years old — took the plunge anyway, getting hitched in a $300 budget wedding in April 2012. Thanks to a short sale, Dan was able to get out from under his mortgage and when they moved into a rental, they had a fresh start but a $30,000 mountain to climb — not including their car loan.

“His take home pay was only $2,000 a month, so Dan did all the overtime he could to bump it to $2,600,” Nancy said. “We paid just over minimum payments at first.”

Then, her love of birds, bags, and sewing changed everything.

“I love to craft. So one day, a friend was watching me sew at home and mentioned she wanted a couple things made for a friend’s birthday,” Nancy said. “So I sewed a few items for her. Then that turned into another item for another friend. Then (a different) friend said, ‘Hey, put your stuff on Etsy.’ I didn’t know what it was at the time. Within a couple months… I made enough for a new sewing machine.”

 

Nancy started making handbags and clutches, often with designs inspired by her pet birds. She made a vow that half the money she made on Etsy would go back into the business, but the other half would be used to pay down her debt. She was making a “couple of hundred” a month for a while, but eventually saved enough to upgrade her machine, which soon was running 10 hours a day, 6 days a week.

“I spent every day sewing and making my little shop bigger and better,” she said. “Studying how to expand and do social media to get my little shop out there. It has blossomed so much.”

And while the business blossomed, the Nemeths’ debt shrank fast. She averages about $2,500 in sales a month, which means she puts more than $1,000 a month toward paying down her debt. They’re not finished yet, but the $30,000 mountain is now more of a $10,000 molehill…plus about $8,000 remains on the car loan.

Paying down debts can also have a positive effect on credit scores – making payments on time and keeping revolving debts on credit cards low relative to credit limits have a big impact over time. This calculator can show you how long it’ll take you to pay off your credit cards.

“We will be completely debt free in ONE year. Can hardly wait,” she said. “Then all the extra will go into savings and a portion to our dream trip to Europe.”

Etsy wasn’t the only step the Nemeths took to attack their debt problem. They also cut out almost all extras. When they go food shopping, they bring the budgeted amount in cash, and never overspend. They plan date nights well in advance so they have something to look forward to, and make choices to keep those costs down, like eating before going to the theater to avoid paying for expensive candy and popcorn.

But finding a way to supplement their income has been the most important step towards climbing out of the hole they were in.

“I have always said do what you love, and if you can find a way, make some of that dream happen,” she said.

Her husband has gotten into the act, too. He recently went back to his old hobby performing comedy. He puts half his comedy income into paying down debt, too. Laughing together is helping their relationship, too.

While their marriage didn’t have an ideal financial beginning, Nancy actually thinks that might have made them closer.

“I think it’s just that we are proud of (our) really tough beginnings being together, but overcoming so much at the same time,” she said. “Go figure. You’re supposed to meet and get married when things are great and all that. But our (story) is opposite. Maybe that was a good thing. Maybe seeing the worst times at the beginning gives a healthy dose of realism and something to really bind a future together. It was a struggle… but nothing we could blame each other for. Just a desire to get out of this life that we ‘think’ we should have according to the white picket fence syndrome.”

And the couple might be able to get out of debt even sooner than expected. After Credit.com began chatting with Nancy about her debt, Etsy featured her store, Birds and Bagz, in an email. Orders spiked for a day, and she earned around $3,500 in July.

“Paying off another credit card tomorrow,” she said. “Feels great.”

What did the couple do to celebrate?

“We are treating ourselves to sushi dinner tonight…which of course we go at happy hour, which is half off,” she said. “Never pay full price.”

More From Credit.com:

TIME Etsy

A Huge Percentage Of Etsy Sellers Are Women

Inside Etsy Inc.'s DUMBO Headquarters Following Company's IPO
Bloomberg—Bloomberg via Getty Images Employees arrive at Etsy Inc. headquarters in Brooklyn.

But just one-third of U.S. businesses are run by women.

Take a look through the names of Etsy store owners online and you’ll notice something cool: They’re nearly all run by women. In fact, 86% of Etsy businesses have female owners, according to a report released by the company.

Meanwhile, just one-third of businesses in the U.S. are run by women, according to the Los Angeles Times. Brooklyn-based Etsy reported that 56% of sellers have a college degree and have an average household income of $56,180.

The median age of the sellers is 39 and over a third are less than 35-years-old.

“When you think of an entrepreneur, who do you picture?” asks Althea Erickson, Etsy’s global policy director, in a blog post announcing the report. “I don’t immediately picture my neighbor, who sews baby quilts at her kitchen table on evenings and weekends, and drops off packages at the post office during her lunch break. Yet that last image is very much the picture of an Etsy entrepreneur.”

“They’re the kind of people that got a lot of compliments on their items and people said, ‘You should sell it,'” said Sucharita Mulpuru, a Forrester Research analyst, to the newspaper. “Etsy provided them a platform for doing so.”

Per Etsy:

76% of Etsy sellers consider their shops to be businesses, and 30% focus on their creative businesses as their sole occupation. This business mindset is also reflected in Etsy sellers’ aspirations—90% wish to grow their sales in the future.

The Etsy report surveyed 4,000 sellers from November 2014 to January 2015. The company says that there are 1.4 million active Etsy sellers around the world.

MONEY Small Business

This Innkeeper Went From No Job to Dream Job

Selena Einwechter, innkeeper at North Carolina's Bed & Breakfast on Tiffany Hill, explains how she launched her dream business.

MONEY Small Business

It’s the Best Time in Years to Get a Small Business Loan

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Ariel Skelley—Getty Images

Approval rates at big banks are the highest they've been since 2011.

Here’s good news for entrepreneurs: Big banks are becoming a tad more generous with small-business loans.

Major banks and institutional lenders have been approving small-business loans at higher rates, while the pace is holding steady at alternative lenders, according to a report this week from Biz2Credit, an online marketplace for small-business loans.

At banks with more than $10 billion in assets and at institutional lenders — including credit funds, insurance companies and nonbank financial institutions — approval rates on small-business loan applications climbed in June, to their highest level since Biz2Credit began tracking them in 2011, the report says.

On the other hand, approval rates at alternative lenders and credit unions were mostly flat. The report was based on an analysis of 1,000 loan applications on the Biz2Credit platform.

“We’ve come a long way,” Biz2Credit Chief Executive Rohit Arora said in a statement. “These are the best numbers for big bank lending since the recession. … It is a good time for entrepreneurs in search of capital.”

This trend is significant because big banks and lenders pulled back from the small-business market during the financial crisis. Alternative lenders stepped in to fill the void in small-business financing, helping create a vibrant, growing market.

That market has started to draw the attention of traditional banks, but Sam Hodges, founder of alternative lender Funding Circle, says big financing companies are, for the most part, still wary of lending to small businesses.

“We continue to see tremendous pent-up demand from thousands of borrowers every month who aren’t able to get attention from a bank,” Hodges tells NerdWallet.

He points out that the Biz2Credit report paints a limited picture since it was based on a “very small sample size.”

“These data don’t illuminate the market as we see it,” he says. “It’s great that they’re providing these data, and they’re better than nothing, but I don’t think they tell the full story.”

Still, Molly Otter, chief investment officer at Lighter Capital, another alternative lender, says the Biz2Credit report paints an upbeat picture.

“Banks becoming more aggressive in their approvals — I think that is great for business owners,” she tells NerdWallet. “The more options they have, the better off their business is going to be, and banks are currently the cheapest form of debt there is.”

Some key takeaways from the Biz2Credit report:

  • Big banks approved 22.1% of small-business loan requests in June, up slightly from May and the eighth consecutive monthly increase. By comparison, at the lowest point in June 2011, big banks approved only 8.9% of small-business loan applications.
  • Institutional lenders approved 61.4% of small-business loan applications, which is slightly higher than the rate at alternative lenders. Arora says institutional lenders are now mainstream players in small-business loans and are replacing cash advance companies, whose interest rates he calls “simply too high.”
  • Credit unions approved 43% of small-business loans applications, flat from the previous month. While considered a good option for lower-cost loans, credit unions “continue to lag in small business lending,” Arora says.

More From NerdWallet:

TIME Careers & Workplace

These 3 Tools Will Help You Prepare a Killer Business Plan

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A thorough plan will increase your chance of success

Mission planning in the SEAL Teams always took one of two routes: deliberate or hasty. Deliberate planning assumed a longer term approach (greater than 48 hours) whereas hasty planning was for anything within a 24-hour period — with some missions as soon as now.

While both planning methodologies entailed the same three criteria — time, resources and requirements — two significant differences determined which approach to use: the immediacy of the demand (essentially, the threat) imposed by the enemy (or competitor), and the accuracy of information we had to plan.

For the entrepreneur, it’s tempting to vie for the hasty approach, be like Nike and “just do it,” with hopes that your product will just take off into newfound success. Chances are, however, that it won’t. At least, not without doing the due diligence that gathers enough information to formulate an impenetrable business plan.

To the extent that you can do a thorough, deliberate analysis of the industry, do it. There are tons of free tools that can guide you through the process. In the meantime, here are three simple business analysis tools to help you identify what distinguishes your brand from the rest:

1. PEST

Not to be confused with animals or people, PEST is a way to analyze the big picture changes within your industry to identify growth opportunities. Specifically, the acronym stands for:

  • Political factors
  • Economic factors
  • Social factors
  • Technological factors

Another variation of PEST is PESTLE, which includes the legal and environmental considerations. If you’re stuck on where to begin, start by segmenting each factor into the five W’s — who, what, when, where, why — then unleash the (mental) fury from there.

2. SWOT, the enhanced version

While PEST offers a macro-level view of the competitive landscape, SWOT is typically used at a more micro level to analyze a specific business, product or service. Here’s the value of SWOT:

  • Strengths. While the number of beers you can slam or the number of pushups you can crank out in 60 seconds are certainly enviable qualities (at least, they were when I was in college), competitive strengths are the advantageous skills, resources, capital, network or value that distinguishes your brand from all others. They are why consumers want you and you alone.
  • Weaknesses. A pretty straightforward term. However, if you’re unsure of what your weaknesses are, take your strengths, flip them upside down, and boom, there they are. Weaknesses are where your strengths fall short in comparison to your competitors’. These may be internal disadvantages within your company such as additional bureaucracy or processes, or external weaknesses that fall prey to the market, economy or technology.
  • Opportunities. This is where you leverage your strengths to exploit openings such as lower interest rates, competitor prices, seasonal changes or consumer trends.
  • Threats. These are bad. They are the little guys who work for Murphy and impose his not-so-likable law. Of course, the opposite is true, too. Threats have a way of revealing your current state, they unearth the ill prepared and reveal them for what they are: developmental opportunities. We had a saying in the SEAL Teams: You don’t rise to the occasion, you fall to the level of your training.

Here’s the secret to maximizing the value of a SWOT analysis: Pit your strengths against your opportunities and use the result as leverage points to build greater value. Place your weaknesses against your threats and use the byproduct as defense points. This way, weaknesses don’t diminish and strengths become stronger based on emerging opportunities.

3. 7S model

Unlike the aforementioned tools that are generally used for external analysis, the 7S model looks inward at your own company. Developed by McKinsey & Company, the seven S’s of strategy, structure, systems, style, shared values, staff and skills demonstrate why organizations don’t operate as a group of independent silos but rather as a network of interconnected parts.

Imagine an octagon and place an S at every vertex, except for “shared values.” Shared values belongs in the center of the octagon because, well, they’re shared. Now, draw a line from each vertex to another such that each S is connected to another and you see how each component is inextricably linked to another.

Writing a business plan doesn’t have to be agonizing — there can be some fun in doing it. More so, the simple act of writing out your business plan through the aforementioned perspectives will reveal previously unconsidered insights that will set you up for success.

This article originally appeared on Entrepreneur.com

More from Entrepreneur.com:

MONEY Small Business

The Credit Score Every Small Business Owner Needs to Understand

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Maskot—Getty Images

The Small Business Association has been using credit scoring to prescreen loans up to $350,000 since January of 2014.

Imagine checking your FICO score and finding out it is 300. You’d probably be crushed; after all that’s the lowest (and worst) score you can get under most FICO credit scoring models. But if you were an entrepreneur applying for a small business loan, you could break out the champagne because when it comes to FICO SBSS (small business scores), 300 is the highest score you can get.

Don’t be surprised if you haven’t heard of the FICO SBSS scores. The small business scores created by FICO are still largely a mystery and can be confusing to prospective borrowers, even though they can play a crucial role in the loan you hope to get to fund the growth or expansion of your business. But if you own a business, or hope to in the future, you should learn about them. Numerous lenders use FICO SBSS models and they play an important role in many Small Business Administration (SBA) loans.

Since January 2014, the SBA has been using credit scoring to prescreen 7(a) loans up to $350,000 with a couple of exceptions (SBA Express and Export Express). “SBA loans offer the most attractive interest rates, so if you want to get a small business loan, it’s important to know this score and know it’s up to snuff,” says Levi King, CEO of Creditera.

Here are a few things you need to know about these important, but largely unknown, credit scoring models.

The Range

  • The score range is 0 – 300, and like a consumer FICO score, a higher score is considered stronger because it represents less risk to the lender.

The Formula

A wide variety of factors go into these scores. These may include:

  • The owner/co-owner’s personal credit information
  • Business credit history, age of the business, years in business, etc.
  • Financial data, such as business assets, cash flow, etc.

Beyond that, specifics are very difficult to come by. Unlike the “FICO formula” that describes the main factors that go into credit scores and the impact they have on your credit history. As with all FICO scores, there are many different models and lenders may customize scores to their business needs.

I’ve found that business credit is a source of confusion for many owners, who don’t know it exists and don’t know how to build strong business credit. This process of building business credit can be different than it is for personal credit. For example, while using a credit card can be helpful when building a strong personal credit score, some business credit cards won’t appear on your business credit reports unless you default. And it’s much harder to identify companies that report to business credit bureaus than it is to find ones that will report to the major credit reporting agencies that sell consumer credit reports, where almost any auto or mortgage lender will report payment history on a regular basis.

Unlike consumer lending, if you are turned down for a small business loan due to your business credit reports and/or your business credit scores, lenders aren’t required to tell you why your application was rejected.

The Workaround

If you have very high personal credit scores but little in the way of a business credit rating, you may be able to meet the minimum score required, at least for an SBA loan. And some lenders may be willing to offer funding if you have very high personal credit scores and other qualifications such as strong collateral and great business potential. “Some lenders will look more at the story than at the score,” says Rocco Fiorentino, whose firm, Benetrends, helps franchise owners obtain financing.

I recommend you get a comprehensive view of your credit as soon as you decide to start a business. Business owners should always stay on top of their scores. Here’s how:

  • Creditera offers some business credit scores for free, and a FICO SBSS score is available for purchase.
  • You can purchase several different types of business credit reports and scores from the three major credit bureaus.
  • DNB (Dun & Bradstreet) offers free alerts to changes in your business credit file.

In my forthcoming book, Finance Your Business, co-authored with Gerri Detweiler, I explain the myriad types of information that can go into business credit scores and how to build yours.

Business owners are wise to invest the time and energy into establishing strong personal and business credit before they need to borrow. It’s hard to build one fast, and when the opportunity to expand arises, you want to be ready to take advantage of it.

More From Credit.com:

MONEY Small Business

What Running a Lemonade Stand Can Teach Budding Entrepreneurs About Business

Kids lemonade Stand
Mike Keelty—istock

The annual Lemonade Day event teaches kids to create a business plan for a lemonade stand and turn it into a real, money-making venture.

Tech entrepreneur Michael Holthouse is often surprised by how unfamiliar many adults are with the basics of business. “Many Americans believe revenue and profits are the same thing,” he says.

Holthouse aims to change that through Lemonade Day, a fast-growing program to educate kids about running a business long before they enter adult life. The annual Lemonade Day event, which takes place on different dates throughout the year in 56 cities in the U.S., Canada and South Africa, walks children through a 14-step, month-long process to create a business plan for a lemonade stand and turn it into a real, money-making venture, with a parent or mentor’s guidance. Typically the stands go up each year the first Sunday in May, but there are some exceptions. “Some of our cities are Aspen and Anchorage,” Holthouse says, “There are still 14 feet of snow in some of those cities.”

Holthouse dreamed up Lemonade Day in 2007, after seeing how excited his daughter Lissa got about starting her own lemonade stand when he said he wouldn’t just buy her a pet turtle she wanted and challenged her to raise the money herself. “It was one of the most amazing days we had,” he recalls. “I couldn’t get the whole thing out of my head.” The following year, participants put up 2,600 stands. Since then, the event has grown rapidly, with support from partners such as Google for Entrepreneurs.

While Lemonade Day is meant to help children, it holds powerful lessons for adults, too, says Holthouse, who sold his computer network services company Paranet, to Sprint in 1997 after building it to more than $100 million in revenue, and began devoting much of his time to philanthropy through The Holthouse Foundation for Kids, which focuses on helping at-risk young people.

“There are so many conversations that are straightforward when you think about a lemonade stand but they apply apples to apples to every other business on the planet,” Holthouse says. Often, parents who started out unfamiliar with entrepreneurship prior to participating in Lemonade Day come away with a brand new understanding. “Having a simple vocabulary about revenue, expenses and profit is really enlightening,” he says.

Money spoke with Holthouse recently about what entrepreneurs of all ages can learn from the event.

What are some of the lessons children learn from running lemonade stands?

Holthouse: What we’re teaching is how to start, own and operate their very own business using a lemonade stand. Yes, they are going to learn a whole bunch of business concepts and vocabulary and elements that make up a business, a business plan and a budget and all of those things, but more than anything what we’re trying to bring to life is a set of social and emotional skills that build self-confidence, motivation and grit–the kind of things that will really carry them through life.

We set three big goals up front: a spending goal, a savings goal and a sharing goal. Spending is, after all, why we become entrepreneurs. We all have wants and needs as human beings. We have to figure out how to meet them. [As organizers of Lemonade Day], we believe everyone needs to save some amount of their money. In the lemonade business, some days it rains. As for the sharing goal, the kids make a decision about how much they want to give and whom they want to give it to.

What is wild to me is some of our youth, when the start Lemonade Day, don’t have two nickels to rub together. By the end of the whole process, they are giving material amounts of money to someone they believe is less fortunate. It could be $20 or $50.

Have any of the stands struggled?

Absolutely. Does every business in the world make it? Heck, no. Some of the stands don’t make it, and you’ve got to put that under the category of some tough love. I’d much prefer a child learn early in their life that you don’t always get it right the first time. You may have to do it a second or third time to get it right. The amount of risk they’re taking is so low we say “Get up, dust yourself off and let’s make the next one twice as successful.”

Where do kids go wrong with their stands?

The place where kids go wrong is to set unrealistic goals. The child will say, “My goal is to get an iPad.” That’s a big goal. Perhaps it’s attainable, but when they figure out how many glasses of lemonade they need to sell, they’re going to learn there are ways this doesn’t work.

We spend a fair amount of time with these kids on their business plan–which is a culmination of the answers to the questions we ask them. They put it together in a budget: What are your line items for costs? What are you going to be able to borrow or get for free? What will you have to buy?

When planning a lemonade stand, a trip to the grocery store is a great experience. If they want to market fresh squeezed lemonade, it is labor intensive. We ask them, “Will your market and price be able to support doing this?”

Parents that participate in Lemonade Day with the kids often learn more than the kids do. You want to learn something in life? Try and teach somebody. It becomes very real.

What can adult entrepreneurs learn from the challenges the children encountered?

With the kids we are trying to help, they crawl before they walk and walk before they run. We are helping them start with a business that is sized so that they can be successful. When they are able to save $20 out of their business, they can turn around and be their own investor in the next business they do, whether they repeat the lemonade stand or branch out into whatever business they want to do.

In a lemonade stand, you want to create a great product, have great customer service, and have a way to get repeat customers. These early lessons focus them on thinking about what are the really important things vs. the unimportant things.

For would-be adult entrepreneurs who never had a lemonade stand, how can they get a similar crash course in running a business?

Experiential learning is the hardest kind to do–it’s the most time consuming–but the impact is exponential, compared to sitting in the classroom and just hearing about it. It may sound silly or even self-serving, but if adults who would like to run a business find some child in their life and go through Lemonade Day with them, they will see all the aspects of what it take to start a business. How much money can you lose on a lemonade stand? All you have to do is substitute whatever your business happens to be for lemonade. There are 10,000 books on entrepreneurship, but the way to start a business is to jump in there and make some mistakes.

MONEY Small Business

Entrepreneur Cooks Up Profits With His Grilling Invention

Brad Barrett was working in the chemical industry. Then he found his true calling.

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