Mellody Hobson: Tips for Women Starting a Business

Sept. 15, 2005 — -- There are 9.1 million women-owned businesses in the United States, and although only 6 percent of women-owned businesses have revenues of $1 million or more, entrepreneurship is still the best route to becoming rich.

Mellody Hobson helped kick off a new "Good Morning America" series called You, Inc., which will educate women about how to start up their own businesses. "GMA" talked to four women who started successful businesses with $5,000 or less.

For those women considering starting up their own businesses, knowing which factors promote success is important, but it is equally important to understand why businesses fail. The No. 1 reason is poor management, followed closely by poor financing. Additional contributing factors include lack of experience, competition and low sales.

Below, Hobson answers questions about the rewards and pitfalls of entrepreneurship.

Q: Some women are able to start a business with little or no previous experience. Do you need a specific background to start your own business?

The more experience you have, the better, as there truly is no substitute for experience. The less experience you have the more you are going to need to reach out to mentors and contacts.

Q: How do you know when to quit your job? Is it better to moonlight for awhile?

I believe you cannot be a part-time entrepreneur. The most successful entrepreneurs are those who stop what they are doing and focus only on their business (think Bill Gates and Ted Turner). That said, if you are going to leave your job to start a business, you need to make sure you have built a substantial financial cushion or have lined up enough investors to get you through the lean years. Keep in mind, starting a business is very similar to building or remodeling a home -- it will likely cost you a lot more money than you originally planned.

Q: What are the financial questions you need to ask yourself if you want to start a business?

The major question you need to ask yourself is how you are going to finance your business. Are you going to fund the business out of your personal savings? Will you take out a loan from the bank? Will you ask friends or family for startup capital? Or, will you take on investors and give up equity? Keep in mind, you do not have to think large when asking for money. For example, consider going to your family dentist and asking them for $5,000 or $10,000, or anyone else who you have known for years.

Another question you need to ask yourself is how much is it going to cost you to run the business. What will your overhead be? Are you going to have employees? How much are you willing to take in salary?

Additionally, you need to ask yourself what is the best and worst scenario for your business to determine the amount of money you are going to need to get you through the toughest of times? Also, you need to ask yourself fundamental questions such as, is this good business? Will I be able to make a profit after all of my costs? Is my idea original? And, finally, who or what is my competition?

Q: What other "hidden" financial costs are associated with starting a business?

The biggest hidden cost is health care -- for both you and your employees. While there are family health insurance plans available for as low as $500 a month, many come with deductibles as high as $5,000. However, it is important to offer health insurance to your employees because without it you are not going to get the best talent. The SBA offers a great calculator on their site, www.sba.gov , which helps you to calculate your startup and ongoing business costs.

Additional point of interest:

It is important you have a real "home" office. Your business line should not be your cell phone. If you can, have someone else (even an answering service) answer your phone line.

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is "Good Morning America's" personal finance expert. Matthew Yale and Amiee Z. Daley contributed to this report.

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