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Editor's note: This is part 3 in our series on small business competition. Read Part 1: Analyzing Your Competition and Part 2: Differentiating Your Small Business 

Let’s pretend you own and operate the only hotel in your town for the last 20 years. If people are visiting, they’re staying with you.

For as long as you can remember, you’ve controlled the market. You set the price of the rooms. You picked the wallpaper, sheets, TVs, coffee, and refreshments available in the rooms—you even control the room service menu. In other words, you have had complete reign of the hospitality market in your town and have been able to run your hotel the way you see fit.

However, a new Hilton hotel is scheduled to open nearby in a few months, and you’re worried about what that means for your business. Will you be able to compete with a global brand like Hilton?

Small businesses across the country often face a similar dilemma: they own an established business that they’ve run for many years successfully until being suddenly confronted with a new competitor. Sometimes these new competitors can be big brands, but many times they are other local small businesses.

In either case, learning how to manage new competition is important when competing on Main Street. 

Know Your Competition

As with any guide on business competition, determining strategies starts with analyzing your market and the competitors within it. For established businesses trying to defend their territory from new competition, this means taking the time to understand exactly who’s entering your market, the value they offer customers, and how their arrival will affect you and your other competitors.

For example, maybe you run a successful lawn care business and have operated in your town for 10+ years. You have a base of established accounts and pick up new projects as others fall off month to month. If a new lawn care business decides to enter your territory, how will it impact your business?

If the owner is a local who has lived in your town for many years, they may have a sphere of influence (friends and family) that overlaps with your customer base. This may cause you to lose some accounts because of their relationship with your new competitor.

If you know the owner and their network, you can plan for the potential loss in revenue by adjusting your forecast and budget, or even by taking steps to mitigate the customer defection by offering incentives to stay with you.

In other words, if you know your new competitor and the potential challenges they present to you and your business, you can make better strategic decisions.

Understand Your Unique Difference: Differentiation

The answer to this question is crucial to the longevity of your company—especially when faced with new competition. Knowing your unique difference, or differentiation strategy, gives you a better understanding of why your customers choose you, which you can then use to retain or grow your book of business.

Let’s say you’ve operated a small independent tax accounting business for the last 15 years and are worried about a new H&R Block opening up a few minutes from your company. After filing your clients’ taxes, you ask them a few questions about why they like working with you over any of your other competitors.

You might find that they appreciate the personal care that you provide or they know you’re an active member of the community. Your customers are choosing your business because of you.

With this insight, you could prepare for the opening of H&R Block by becoming more involved within the community and developing marketing collateral to communicate the personal care that you provide as an independent tax accountant and not a corporate entity.

Once you understand what makes you different, you can use that to defend your market share from new competitors.

Lean On Loyalty

The statistics below drive home the importance of customer loyalty to small businesses:

• The probability of selling to a prospect is 5−20%, compared to 60−70% for an existing customer.
• A 5% increase in customer retention can increase profits by 25−95%.
• Highly engaged customers spend 300% more—and 90% more often. 

There is no shortage of options for loyalty programs, and the best solution for your business will often depend on the industry within which you operate. Some popular options for loyalty programs include Square Loyalty,part of the Square software umbrella; Clover Rewards, another POS provider; or the tried-and-true loyalty punch card that rewards frequent customers.

Beyond loyalty programs, consider asking customers for:

• • Referrals: Customers you acquire through referrals are more likely to convert and stick. It’s estimated that referred customers have a 37% higher retention rate.
  • Reviews: Online reviews can be a huge differentiator between you and a new business, especially considering 89% of customers read online reviews before making a purchase. You have the experience and history, make sure your online presence reflects that.
  • Feedback: Customers want to feel like their voice is heard, so take time to ask your customers for their feedback and be willing to make changes when warranted.

Be Open-Minded And Adaptable

For example, maybe you operate a small bakery that has always been cash only, because you don’t want to deal with the processing fees from credit card purchases. While you may have been able to operate this way for many years, if a new bakery decides to enter your market with more flexible payment options, you could see customers leaving because of convenience.

In that scenario, your business has 2 options: continue operating as a cash-only bakery or start accepting credit cards.  

Managing new competition may sometimes require adapting how you run your business. This could mean implementing something as simple as adding new payment options or more complex changes like pivoting your business or eliminating certain products or services. Regardless of the scale, it’s important to approach change with an open mind and to remain flexible.

Don’t Be Afraid Of Competition

Competition breeds innovation and is often in the best interest of consumers.

If you operate a business for an extended period of time, you’re bound to face new competition. Don’t shy away from competitors or be afraid of competition; instead, embrace and grow from the experience.

In addition to benefiting consumers, new competition is actually good for your business, because it:

• Forces you to analyze and improve your own business: It can be easy to get complacent within your business if you’ve been operating it unopposed for a while. New competitors force you to reassess and improve your operations, which can increase your efficiencies and profitability.

• Leads to specialization and focus: New competitors can also help established businesses find their differentiation strategy, which can lead to specialization and better focus. They say a jack of all trades is a master of none—an adage which can also apply to your business. Sometimes competition can help you discover what it is you do best, which can provide more clarity and focus as you grow your business.

• Provides another informative resource: Besides the internal analysis that happens when competitors enter your market, you should also view new competition as valuable resources to study. Watch how they operate and see if there are any insights you can glean from their business. Do they have lower prices? Do they have different offerings? Are there opportunities to improve your own business based on the information you gather about theirs?

Managing New Competition: FAQs

How do you deal with new competitors?

The best way to deal with new competitors is to embrace the challenge and use the competition to motivate you to grow. This motivation could drive you to get rid of unnecessary waste and resources, pivot your business to more profitable activities, or simply improve your operations, adding more value to your customers.

If you view new competition as an opportunity to improve your business, you’re likely to find ways to benefit from this perceived negative.

How does new competition affect your business?

The more options available to your customers, the more likely they are to choose someone else. When more competitors enter a market, it makes it harder for established businesses to maintain their previous level of market share. 

Beyond the bottom line, competition can also challenge the way established businesses operate by offering new perspectives and solutions to customers. For example, consumer demand for taxis was forever changed when ride-sharing apps like Uber and Lyft made transportation easier and more convenient for riders.

What are examples of new competitors?

Direct competition includes businesses that offer the same services or products as your small business. If you run a daycare service, any other daycare business is a direct competitor because they’re offering parents the same service as you.

Indirect competition includes businesses that target the same customers but offer a different product or service than yours. Instead of daycare businesses, after-school tutor services could qualify as indirect competition because they attract the same customers, offering different services that satisfy a similar need: supervising children.

New Competitors Means New Opportunities

By taking the time to assess your current situation alongside the potential effects of a new competitor, you can find opportunities to improve and grow your own business. While you may see a downturn in business at the onset of a competitor’s arrival, if you stay focused and continue looking for ways to improve, you’re likely to find yourself in a better position down the road.

Disclaimer: The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. 

My spam folder is littered with emails from businesses I don’t currently patronize. Some of them—like my favorite nail salon in a town I no longer live in—have been replaced with new local spots, so any offer they send me goes ignored, no matter how attractive it is. (Unless it comes with a free plane ticket, of course.)

I’d gotten out of the habit of patronizing other businesses during the pandemic’s fluctuation, like my nearby yoga studio that’s now welcoming customers back with revamped safety protocols and class-package specials. And for other businesses still, a bad customer service experience—like repeated delivery errors from the local market that just can’t seem to get my order right—means I’m no longer interested in giving them a fourth, fifth, or sixth chance.

If you’re the owner of this salon, studio, or market, however, you might not know why I’ve filtered your emails to spam and stopped crossing your threshold or using your app—or whether my decision is just for now or forever.  

Why good customers go dormant.

A customer can go dormant for 3 main reasons:

1. they’ve forgotten about you, but still are interested in what you have to offer
2. their need for your offerings or products has shifted, either temporarily or permanently
3. they’ve had a bad experience and don’t wish to give you their business anymore

Are you facing a roster of inactive or under-active clients or customers? Read more to learn how to bring some of these customers back into the fold, how to find out which customers probably aren't worth pursuing, and when to say goodbye to others for good.

Why rekindle an old relationship?

There are new customers out there—so why bother trying to win back your dormant ones? Put simply: they’re more valuable than new customers. 

A study conducted by Marketing Metrics and analyzed by American Express found that small businesses have “a 60–70% chance of successfully selling again to a current customer, a 20–40% chance of winning back an ex-customer, and a 5–20% chance of turning a prospect into a customer.” 

The best marketing strategy takes into account all 3 of these customer categories, of course, but the data shows that ex-customers are 2–4 times more likely to shop with you than a newbie. Make sure you’re not overlooking this key demographic with these 3 tips to entice them back to your doorstep or website.

Strategy 1: Reach out.

The inactive customers at the center of your recruitment strategy should be those who still need your offerings, but may have forgotten what you offer. 

To reach them, come up with a few different ways to put yourself back on a customer’s radar. These could include simple reach-outs via email (beware the spam folder, though!) or a social media campaign highlighting your latest and greatest promotions.

When my local yoga studio launched a targeted Instagram campaign advertising a BOGO class package for the summer, I jumped at the chance to return—and I’d never have known about it if they hadn’t proactively let me know what they were offering.

Strategy 2: Give a gift.

As a millennial woman, I grew up on Clinique skincare. Anyone my age who did the same knows all about their free-gift-with-purchase phenomenon, where a certain spend means a new makeup case and travel-size favorites to fill it with. It’s a promotion that exists across the beauty-product spectrum (I now take ample advantage of it at Sephora), and a strategy that you can leverage to recruit ex-customers back.

Send your dormant customers valuable content or a free product you can assume they’ll need because you haven’t seen them—like a treatment mask to clear their pores before they come in for a facial or a bonus box of printer paper for your B2B office client. For content, how about some free recipes that include your business’s homemade pasta or an exclusive how-to tutorial on repotting houseplants that would look beautiful in your home-goods store’s new planters?

Strategy 3: Create an exclusive opportunity.

Consumers love an insider opportunity—and especially if they’re free or low-cost for your business to offer, so should you. Let your inactive customers know that you have a special offering just for them, and you just might draw them back into your cohort of shoppers.

For example, if you’re a boutique vintage clothing store, you could offer your 6-month-dormant clients an exclusive spring trunk show. A bike shop could schedule an in-person maintenance workshop for folks dusting off their wheels for the new season—and who haven’t shopped for gear since last summer. For e-commerce sites, a WELCOMEBACK discount email code solely for customers who haven’t shopped with you in 2022 could entice them back to—and through— your checkout. 

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What if they're just not that into you?

What about the other 2 groups of customers—those who either no longer need what you offer or who’ve had a bad experience with your business? The first step is figuring out which type of customer they are and proceeding accordingly.

Chris Cristoff at Forbes recommends utilizing a survey to get to the bottom of this issue. “You can easily find out why customers are leaving by sending an exit survey to email subscribers. When someone goes a specific period of time without completing an order, or cancels their membership, send a short survey with targeted questions. You could ask them what your company could do to get them to stay.”

This survey could include a few key questions, including:

• What was your last experience with [Business Name] like?
• On a scale of 1−10, how satisfied were you with this experience?
• On a scale of 1−10, how likely are you to shop with us again?
• If you’re no longer interested in shopping with us again, can you share your reason why? (This could include a drop-down to guide them into categories useful for your analysis, like No longer interested in product/service, Negative experience with company, No longer live in the area, and any other relevant categories specific to your business.)

Based on their response—or lack thereof—you can weed out the no-longer-interested (no reply) from the frustrated or satisfied, based on how they rate your services or products. For those who express interest in returning, it’s time to utilize the 3 strategies above.

For those customers who report a negative experience, it’s all about customer service. Thankfully, Lendio’s got a guide all about solving this tricky, nuanced problem. If it seems like a customer is still reachable, use every reasonable tool at your disposal to recruit them back to your business. 

If not—like my ongoing market-delivery-fail—it’s time to let them go, address the issue at hand if relevant, and put your money and energy to work helping other customers.

Your small business is different than any of the other 32.5 million small businesses in the US, right? But do your customers know it?

Whether you’re looking to start a company find a way to set yours apart from the pack, however, you need more than just a good idea, funding, and elbow grease—you’ll need a differentiation strategy.

Why Is Differentiating Your New Business Important?

Your differentiation strategy is how you distinguish your business, your products, and your services from other businesses in your space. It may highlight a specific quality of your service or a price points or even a company mission or philosophy. Differentiation is an important way for your business to add value, increase brand recognition, and gain a competitive advantage. And the more competition in your market, the more important differentiation becomes. 

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Continuing with the gelato example, you may find that you can differentiate by offering flavors that no competitor in your market has. By stepping outside the scope of what your competitors offer, you can suddenly provide new unmatched value. These unique flavors give you an advantage over your competition and can help you acquire customers who may not have switched previously.

Unfortunately, differentiating your gelato business in a competitive market may take more than just adding additional flavors or unique toppings. You may need to dive into your competition to find the best opportunities to differentiate your small business from others on Main Street.

Start By Analyzing Your Competition

With this new perspective, you can now begin to identify your unique advantage(s)—differentiation—or what you aspire your unique advantage(s) to be.

For example, you may decide to open a clothing retail store. Selling apparel isn’t necessarily unique and the market may already be saturated with competition, so how do you plan to stand out?

Maybe you offer a clothing rental service, maybe you hire a fashion consultant to assist your customers, or maybe you focus only on businesswear. Before you can find a unique path forward, you need to see what already exists—and what opportunities are available.

A competitive analysis will offer more direction for you to build your differentiation strategy, and it should be an always-on exercise you conduct to make sure you are continuing to develop competitive advantages.

How Do You Differentiate Your New Small Business?

Below are 3 common differentiation strategies for small businesses to consider.

1. Provide An Unmatched Customer Experience

Differentiating your new business through quality customer service will benefit you in the short and long run because it can:

• Improve customer retention
• Increase the customer lifetime value (CLV)
• Build brand equity and awareness
• Lead to more referrals and word-of-mouth advertising

Providing a great customer experience goes beyond customer service; it extends to the entire customer-business interaction. Other ways to improve the customer experience can include:

• Set clear and honest customer expectations: Some businesses have the tendency to oversell and underdeliver, which can leave the customer feeling misled or dissatisfied. For example, many construction businesses will set unrealistic timelines on projects just to win the bid. As work gets underway, they may ask for extensions, miss deadlines, or cut corners just to hit those timelines—which can all have negative effects on the client experience. Instead, be honest with your customers and set expectations that you can hit or exceed. This will ultimately lead to more satisfied customers and can improve your brand’s reputation within your market.
• Be mindful of your customers’ time: Time is money, right? Well, it can certainly feel that way to your customers—especially when you leave them waiting. A study from TimeTrade found that 75% of retail businesses surveyed lost customers due to time-related issues. These issues can include wait time, travel distance, service time, or transaction delays. These time-related issues can negatively affect the customer experience, but they can also be opportunities for you to prioritize and differentiate yourself from the competition.
• Make the shopping experience memorable: If you want to differentiate yourself from the competition, create a memorable shopping experience. This can include a fun and vibrant atmosphere, friendly staff, a streamlined store layout, or customer-centric features like buy-online-pickup-in-store (BOPIS). A recent study from SOTI found that 73% of people surveyed thought self-service checkout options improved the in-store shopping experience—which may be an opportunity for you to differentiate your business and improve customer satisfaction.

2. Find And Own A Niche

Take Under Armour, for example, which recently surpassed Adidas as the #2 sports brand in the US with a 14% market share behind only Nike (46%). When Under Armour started in 1996, nobody could have imagined this moisture-wicking athletic T-shirt company would grow to become Nike’s biggest rival. Before expanding to jerseys, shorts, or shoes, it spent its early years focused solely on athletic shirts and working to dominate that niche.

Finding and owning a niche within a larger market is a great strategy for new businesses because it’s based on differentiating yourself to a specific audience that’s being underserved. By narrowing your focus, you can devote yourself to satisfying a unique need or problem—differentiating yourself as the go-to business for that audience.

The main benefits of using the niche strategy to enter a competitive market are that you can:

• Remove some of the competition: By isolating a subset of a market, you can phase out some of the indirect competitors. Yes, other businesses may sell workout equipment or bicycles, but if you sell racing bikes and equipment for marathon cyclists, you can eliminate the less-targeted competitors.

• Charge more for your product or services: Customers are usually more willing to pay for specialty products or services that are uniquely targeted to their needs. While you may have fewer potential customers, you can often earn more per transaction.

• Simplify your marketing efforts: Targeting a niche within a larger market allows you to focus your marketing on that single audience. By narrowing your marketing to focus on what differentiates your business, you can develop a more loyal community and grow your identity to align with your differentiation strategy.

3. Add More Value To Your Community

Instead of focusing on internal changes to add value to your customers, consider going outward and adding value through community involvement. While not directly related to your business, it can increase your brand image and loyalty—which can be especially helpful for differentiating a new business in a saturated market.

For example, if you’re starting a dog grooming business, you could become a volunteer at the local humane society or offer your services at some of their adoption events. Not only is a great way to build trust and good will in your community, but it can provide a great platform for networking with potential customers.

Some ways you can get involved in your community and add more value include:

• Attend or host industry-related events: Networking at events or hosting meetups can get your new business in front of other people in your community and help to position yourself as an influential member of the community and subject matter expert. For example, if you’re opening a tax business, consider organizing tax planning meetups for local companies every quarter. Not only can you use it to acquire new clients and market your specialty, but you can build your name within the community and establish goodwill.
• Volunteer, donate, or sponsor locally: 85% of customers view businesses that contribute to charities in a more positive light. As a new small business, consider finding local causes that align with your mission and contribute time or money. You can also sponsor other local events to attach your business to causes or activities others in your community care about.
• Partner with established, complementary businesses: If you want to add more value than your competition, find complementary businesses to collaborate and partner with. For example, if you’re opening a lawn care business, consider partnering with an established pool cleaning business to offer a summer package of pool cleaning and yard services. Not only can you provide more value to customers through lower prices or more convenience, but you can use that brand’s established name and client base to penetrate the market as a new business. 

FAQs

How do you communicate your differentiation strategy to customers?

Your differentiation strategy needs to be a cohesive part of your marketing mix and your customer experience. From your social channels and website to your store displays and advertising, there needs to be a clear and consistent message explaining your unique difference.

Remember, differentiation is more than just what you say, it’s what you do and how you do it. If you’re selling quality as your differentiation, your office, product, employees, website, and even logo needs to convey that message. You’re a new business, you need to build trust quickly and a cohesive strategy can help you do that.For example, if you are trying to penetrate the market as a low-cost provider, you should have signs and marketing collateral that compares your price to others in your area. You may also want to implement a store policy where you will beat any of your competitors’ prices. A lot of businesses claim to offer the best price, but if you will actually beat any price from your competitors, you are likely to build a reputation quickly as the brand with the lowest, best price.

What are the risks of a differentiation strategy?

The risks with differentiating your new business include factors like:

• There may not be enough demand: If you try differentiating through a niche focus, there may not be a large enough market to sustain your business.
• Consumer interests change: Buying habits, technology, environmental changes, and other unpredictable factors can affect your unique business.
• Resources may be limited: Differentiating can take effort and resources, which you may not have readily available or may be better used elsewhere in your business.

What is an example of differentiation in business?

Apple is a great example of differentiation because they have to build a brand that makes their products more “valuable” in the eyes of customers even if the technology is not much different from what else is available. Customers, in many ways, are buying Apple products (much like Starbucks) for the brand name or prestige they feel and not the tangible features.

Make Your Difference Matter

These subtle factors, in addition to the differentiation strategies outlined above, can have a huge influence on the success of your new small business. Even if you’re not able to implement major differentiation strategies at the onset, you can still prioritize small habits like excellent customer service and reliability, which can still help to differentiate you from the competition.

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The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Your business is diving into social media, so what about Twitter and LinkedIn?

Twitter and LinkedIn are very different platforms—one’s a firehose of information and the other is a professional network—they’re similar from the business owner’s point of view because they’re both useful tools for brand-building. In LinkedIn’s case, you’d do it with long-form content where you can give customers more reasons to trust you by sharing opinions and solutions for issues that matter to them. Twitter, on the other hand, is the place to be seen by the press who will then amplify you to their audiences.   

But could LinkedIn and Twitter really help you grow your small business? 

There are several key variables to consider, but the primary one (as always) is audience: who is your primary customer base, and how are they connecting with other brands and businesses on social media? 

Once you’ve answered that question, let’s apply your findings below to LinkedIn and Twitter’s users and see if they're the right fit for your needs:

LinkedIn

While most social media channels serve multiple niches, LinkedIn’s a bit different: they’re known as the network for all things work-related. Their mission to “connect the world’s professionals to make them more productive and successful” has made them indispensable to American businesses of all sizes, as well as to their employees.

Here’s who else is using the network:

• Number of monthly active users: 810 million
• Largest age group: 25−34 (58.4%)
• Gender: 48% female, 52% male
• 63% of LinkedIn users access the network weekly, and 22% daily

While B2C companies have had some recent success on LinkedIn,  your B2B relationships are where LinkedIn will benefit you. According to Sprout Social, “a staggering 79% of marketers say that LinkedIn is a prime source of new leads” for B2B brands and businesses. 

Unlike Twitter, where short missives rule the day (more on that below!), driving growth to your LinkedIn page is all about thoughtful post-crafting and mutual engagement between your business and like-minded others. Since its primary audience is more professionally geared, think of your LinkedIn posts more like the content you’d share in the workplace, vs. the more personal or intimate content that might come from a solo Instagram or TikTok account.

LinkedIn also can serve as a vital hiring hub. Not only is the platform a great place to network with other businesses, it’s also a prime place to find new workers: “each week,” say the experts at Sprout, “40 million people use LinkedIn to search for employment opportunities.” If you’re not already looking here for new talent, it’s time to start.

Twitter

The end of April 2022 has been a banner time for Twitter headlines: Tesla and SpaceX CEO Elon Musk’s $44-billion bid to buy the platform was front-page news on April 25, and at the time of publishing this post, Twitter has accepted the offer, which was under review by federal regulators.

The New York Times reports that if it does go through, it will be the largest deal to take a company private in at least 2 decades. 

A lot is still uncertain—but for now, here’s what to expect from the primary users of this social media network, known for its short-form text focus and like/retweet engagement style.

• Number of daily active users: 211 million (up from 187 million)
• Largest age group: 18−29 (42%)
• Gender: 38.4% female, 61.6% male (no data on other genders)
• Time spent per day: 31 minutes

Building a Twitter following is all about voice. If your business had a personality, what would it be—and how would you communicate it? And importantly, how would you do it in a sentence or two, as the character count on the site maxes out at 280 characters per tweet?

One of America’s shining examples of a strong Twitter personality is the restaurant chain Denny’s, whose irreverent and meme-driven online persona gained the brand nearly half a million followers and a ton of industry press about the followers they get, which gets them more followers and more press and so on. They’re even selling their most famous tweet as an NFT for charity. 

Like LinkedIn, Twitter thrives on connection. It’s not just about creating and sharing media—you also have to interact, and often, to grow your imprint and understand why certain topics are trending (valuable information for you to reach potential customers). 

There are countless ways to build this engagement, but one that’s especially common—and helpful—is Twitter’s use as a customer-service arm for concerned or frustrated customers. According to Podia’s Rachel Burns, “Offering real-time customer support on Twitter has its pros and cons. On the one hand, customers expect it: 57% of customers who reach out to brands have a question, and 45% have an issue with the product or service.” 

Burns also points out, though, that providing this service on Twitter—however helpful—could lead to burnout for smaller businesses or solo entrepreneurs who may not have enough hours in the day. Before tackling this aspect of Twitter for your small business, ask yourself first: how quickly can I respond to customers? Perhaps bringing on a social media manager will help to build this branch of your social-media presence.

LinkedIn vs. Twitter: Which platform is best for my business?

Unlike the previous two posts in our series, which considered similar pairings of social networks (Facebook and Instagram are both Meta products, and YouTube and TikTok both thrive primarily in video formats), LinkedIn and Twitter serve 2 vastly different functions for a small business. 

You may find as a result that both platforms could aid in your growth, whether you’re looking for new employees and B2B clients (LinkedIn) or to learn more about what’s trending and why (Twitter). 

Read more about using social media for your small business.

Managing Social Media for Your Small Business: Getting Started

Managing Social Media: 3 Tactics to Connect With Customers

Do Facebook and Instagram Make Sense F=for Your Small Business?

YouTube vs. TikTok: Which is Better for Your Small Business?

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Self-employed individuals miss out on employer-sponsored benefit programs, but they can still access powerful tax-advantaged accounts to help fund their retirements. The Solo 401(k) and SEP IRA are two of the most popular choices.

If you’re a freelancer, independent contractor, or small business owner, here’s everything you need to know about their differences to determine which is best for you.

What is a SEP-IRA?

SEP-IRA is short for Simplified Employee Pension (SEP) Individual Retirement Arrangement (IRA). In addition to being a mouthful, the name is a bit of a misnomer. SEP-IRAs have very little in common with pensions and are not defined-benefit plans.

Like traditional IRAs, they’re defined-contribution plans where contributions are tax-deductible in the year you make them. In addition, the capital gains and dividends generated within the account are tax-deferred until withdrawn.

Unlike traditional IRAs, SEP-IRAs are primarily profit-sharing plans for the self-employed and their employees. Business owners can contribute company earnings for each plan participant, but employees can’t contribute through salary deferrals.

For employees to put funds into their SEP-IRA, they must forego making those contributions to their Traditional or Roth IRAs. The $6,000 contribution limit for IRAs in 2021 and 2022 applies to Traditional, Roth, and SEP-IRAs, collectively.

The maximum contribution for each SEP-IRA participant is the lesser of 25% of their salary and $58,000 in 2021 or $61,000 in 2022.

If you own a sole proprietorship or partnership and have no wages, the limit is 20% of your net earnings minus half the self-employment tax from your IRS Form 1040 instead.

Notably, employers must make proportional contributions for themselves and all eligible employees. In other words, every participant’s contribution must be the same percentage of their compensation.

Though you can use less strict requirements, eligible employees must include those that meet the following criteria:

• Age 21 years or older
• Earned $650 or more during the tax year
• Worked for the business in at least three or the last five tax years

For example, say you own a corporation. You pay yourself a $100,000 salary, and your eligible employee’s salary is $50,000. If you contribute $10,000 to the SEP-IRA for yourself, you must contribute $5,000 for your employee so that both of you receive 10%.

What is a Solo 401(k)?

A Solo or Individual 401(k) plan is the same type of account as an employer-sponsored 401(k) plan, only for business owners with no employees. Otherwise, they provide much of the same benefits and follow many of the same rules.

For example, a Solo 401(k) allows tax-deductible contributions and tax-deferred asset growth within the account. Alternatively, you can choose to make Roth contributions. They're taxable when you make them but tax-free upon withdrawal.

Another trait they have in common is that employers and employees can contribute. However, as a self-employed individual, you play both roles. That gives you a significant degree of control over the amount you put into the account.

Your maximum employee contribution is the same as an employer-sponsored 401(k)’s. You can defer 100% of your compensation up to $19,500 in 2021 and $20,500 in 2022, plus a $6,500 catch-up contribution if you’re over 50 years old.

Through your employer role, you can also make profit-sharing contributions. Like a SEP-IRA, the limit is 25% of your salary or 20% of your net business earnings minus half your self-employment taxes.

The total amount you can contribute to the account is $58,000 in 2021 and 61,000 in 2022. That limit applies to your employee and employer contributions combined.

Solo 401(k)s usually let you save more each year than other self-employed retirement plans. Typically, the only reason not to have one is that they’re only available to businesses with no full-time employees other than the owner and their spouse.

Differences between the two.

Solo 401(k)s and SEP IRAs are both defined-contribution retirement accounts with similar tax advantages for the self-employed. However, there are significant enough differences between them that one will usually be a clearly superior choice for you.

Here are the primary things to consider when choosing between the two retirement plans.

Account eligibility

You can only use a Solo 401(k) plan if your business has no employees other than you or your spouse. If you hire someone else to help with your operation full-time, you won’t be able to open or contribute to one.

Conversely, you can still open and contribute to a SEP-IRA with full-time employees. But remember, if they meet the eligibility requirements discussed in the previous section, you have to make proportional contributions for them too.

Contribution limits

When you’re choosing a retirement plan, one of the most significant considerations is the amount each one lets you save each year. The Solo 401(k) and SEP-IRA contribution rules lead to drastically different retirement savings amounts.

The primary differences between their contribution restrictions are the following:

• Employee contributions: Solo 401(k) plans allow employees to defer 100% of their salary, up to $19,500 in 2021 and $20,500 in 2022, while SEP-IRAs generally don’t allow employee contributions.
• Catch-up contributions: Solo 401(k) plans allow up to $6,500 in annual catch-up contributions for people 50 years or older, but SEP-IRAs don’t.

As you can see, the contribution rules for Solo 401(k)s are generally more favorable than those of SEP-IRAs. In most cases, you’ll be able to save much more money each year with a Solo 401(k) than you would with a SEP-IRA.

For example, say you’re a 55-year-old sole proprietor with $100,000 in net earnings during 2021. Because you have no salary, you could contribute 20% of your net earnings after self-employment taxes to a SEP-IRA.

The self-employment tax is 15.3% and applies to 92.35% of your self-employment income, so you’d owe $14,130 that year. Half of that amount is $7,065. $100,000 minus $7,065 is $92,935, and 20% of that is $18,587.

Conveniently, that same calculation gives you your maximum employer contribution through a Solo 401(k). As a result, if you only made employer contributions, you’d save $18,587 with both retirement accounts.

However, a Solo 401(k) also lets you make up to $19,500 of employee contributions. Since you’re over age 50, you can also make $6,500 of catch-up contributions. That means you’d be able to contribute a whopping $44,587 with the Solo 401(k).

Tax deduction timing.

Both Solo 401(k)s and SEP-IRAs let you make traditional contributions that reduce your tax liability in the year you make them. Growth within the accounts is also tax-deferred until you make withdrawals.

However, Solo 401(k)s also let you make Roth contributions. These won’t lower your tax liability the year you make them, but you won’t have to pay any taxes on the back end when you take your money out of the account.

Loan availability

Generally, you’ll pay a 10% penalty if you take money out of your retirement accounts before age 59 ½. That restriction applies to both SEP-IRAs and Solo 401(k)s.

However, Solo 401(k)s let you borrow against your funds and avoid that penalty. There are complex considerations involved, and you have to pay the amount back within five years, but it can be an asset in emergencies.

That said, borrowing against your retirement is highly inadvisable in most situations. As a result, this difference shouldn’t be much of a deciding factor.

Deadlines

One advantage of a SEP-IRA over a Solo 401(k) is that you have until you file your taxes to open a SEP-IRA for a given tax year. Conversely, you have to open your Solo 401(k) before the end of the tax year or you’ll lose your ability to contribute for that year.

If both accounts are open by the end of the year, you have until you file your taxes to make a profit-sharing contribution to both. However, you only have until December 31st of the tax year to make employee contributions to your Solo 401(k).

Administrative requirements

In general, Solo 401(k)s have more demanding administrative requirements than SEP-IRAs. If you have more than $250,000 in your Solo 401(k), you must file an annual report with the IRS, but there’s no need to do so with a SEP-IRA. 

Which one should I choose?

Generally, the Solo 401(k) is the superior retirement account for a business owner with no employees. It has several significant advantages over SEP-IRAs, including the following:

• Higher annual contribution limits
• Employee and employer contribution options
• Access to traditional 401(k) and Roth 401(k) contribution types

However, if you already have or plan to hire full-time employees other than you and your spouse, you won’t be able to open or contribute to a Solo 401(k). In these cases, a SEP-IRA would be the only one of the two retirement account options available to you.

That said, picking a retirement account for your business is a significant and complicated decision. Before you choose one, it’s always a good idea to consult a Certified Public Accountant (CPA) or another expert to get personalized tax advice.

Lendio offers free accounting software for small business that can make your financial planning much easier. Give it a try today!

Can you contribute to both a SEP-IRA and Solo 401(k)?

Yes, you can contribute to both a SEP-IRA and Solo 401(k) during the same tax year. However, there’s usually no reason to do so. Your maximum contribution amount is generally the same whether you use a Solo 401(k) by itself or together.

However, there are some situations where you may want to contribute to both. For example, if you already contributed to a SEP-IRA during the tax year, you may wish to open a Solo 401(k) to take advantage of the employee salary deferral.

Is a Solo 401(k) worth it?

Yes, a Solo 401(k) is worth it for the average self-employed person. It typically gives you the ability to save far more for retirement than you would with other account types. If you’re over the age of 50, you could save a whopping $67,500 in 2022.

In addition, Solo 401(k)s have more flexible annual contributions than other self-employed retirement accounts. They also let you make Roth 401(k) contributions that aren't tax-deductible when you make them but are tax-free upon withdrawal.

Is a Solo 401(k) tax-deductible?

Generally, all retirement contributions to your Solo 401(k) are tax-deductible, whether you make them via your employer or employee persona.

In addition, the dividends and capital gains your assets generate while they remain in the account are tax-deferred. That means you won’t pay any taxes on them until you withdraw your funds from the account.

The only reason contributions to a Solo 401(k) wouldn’t be tax-deductible is if you create a Roth Solo 401(k). Roth contributions are taxable the year you make them, but the funds are completely tax-free when you withdraw them.

Can I contribute 100% of my salary to my Solo 401(k)?

With a Solo 401(k), you can make employee contributions up to 100% of your salary. However, there’s a hard limit of $19,500 in 2021 or $20,500 in 2022, plus a $6,500 catch-up contribution if you’re over the age of 50.

You can also make an employer contribution of up to 25% of your salary. However, it can’t exceed $58,000 in 2021 or $61,000 in 2022 when you combine it with your employee contributions, not including any catch-up amounts.

In other words, if your salary is within those limitations, you can contribute 100% of it to your Solo 401(k). However, if you earn more than that, you won’t be able to defer your entire salary.

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

You already know that the top factor to consider when deciding on the social media channels that make sense for your small business is audience: who is your primary customer base, and where are they connecting with other brands and businesses on social media?

So what about video? Should you use YouTube or TikTok to reach your audience? While both channels rely mainly on videos to engage users, they otherwise differ wildly across the board—from audience age to video length and beyond.

Why video?

Most of the folks who use social media aren’t experts in creating or editing video content, which can make entry into video-based platforms feel daunting. But video has never been more important: according to Imagen, online videos will account for over 80% of all consumer internet traffic by 2022. And an Optinmonster study found that a whopping 84% of consumers state that they’ve bought a product or service after watching a brand’s video. With such a sizable majority of internet users engaging with video, shouldn’t your small business be next?

Not all video-based social media platforms reach the same audiences, however. While Facebook “still remains the largest social platform among consumers and marketers” alike, as found by Sprout Social, YouTube and TikTok rely on video as their primary medium, making them the perfect places to zero in on building video-based relationships with your audience. 

Wondering which platform is best for your business? We’ve got the details to get you started.

TikTok

If you’ve been wondering where Gen Z was getting their social content, look no further: they’re nearly all on TikTok. This short-form video-based social media app, owned by the Chinese company ByteDance, is booming in popularity, with most of its wild growth attributable to teens and pre-teens: 

• Number of monthly active users: 1 billion
• Largest age group: 10−19 (25%)
• Gender: 61% female, 39% male (no data on other genders)
• Time spent per day: 89 minutes per day

TikTok users are also the most likely, by percentage, to buy a product that they’ve encountered on the platform. Just under 40% of Gen Z social media users reported buying a product they found specifically in TikTok videos in 2021, compared to 23% of purchases via Instagram ads or 19% via Facebook ads. 

If your small business’s products or services primarily target this age group, it’s non-negotiable: time to start a TikTok account. A product going viral on TikTok, like the 300+-million-views-and-counting hot chocolate bombs (#hotchocolatebombs), can shoot a crafty entrepreneur into the revenue stratosphere.

Because TikTok is a video-based platform—specifically, one with the unique ability to “stitch” or connect videos with others from different accounts—it’s a great way to get people to organically showcase how much they love your offerings. My favorite beauty store here in Chicago, the Korean-skincare wonderland Choc, uses TikTok to demonstrate the best ways to use their myriad skincare offerings—some that you can only buy from Choc. The before-and-after tutorial content that their videos offer is hard to beat. 

On TikTok, engagement is all about hashtags. Knowing which recurring hashtags help make videos go viral and connecting those authentically to your small business will expand your reach on the platform tremendously.

YouTube

After Google, there’s literally no search engine more popular in the world than YouTube (which is owned by…Google). While TikTok thrives in the short form, YouTube showcases longer video content: up to 15 minutes for users and beyond 15 minutes for verified users. The platform also boasts a broader age range and more uniform gender breakdown than TikTok, as well as double the overall users:

• Number of monthly active users: 2+ billion
• Largest age group: 15−35 (highest reach)
• Gender: 46% female, 54% male (no data on other genders)
• Time spent per session: ~30 minutes

Unlike TikTok, however, the experts at Sprout Social have found that most YouTube users turn to the site for entertainment, vs. hunting for new favorite products or brands. “Brands still have a lot of work to do on the platform,” they note, “finding a balance between entertainment and advertising.” 

Threading this needle can be challenging, but the rewards are worth it. Unlike TikTok, “[YouTube] supports active content marketing with a clear call to action,” states the social-media gurus at Promo. “You can ask your audiences to subscribe to your channel, watch other videos, leave comments, [and] visit your website or other social media pages.” Boosting your overall content web in this way can make hugely positive impacts on your business’s bottom line.

Video may be king—but which platform is best?

You may now be sold that video-based content is best for your small business—but which of the above platforms is best to host that content? 

A service-oriented business with fast, fascinating services—like a restaurant making a massive sandwich or a salon doing ornate manicures—could utilize short-form TikTok videos to offer a behind-the-scenes glimpse at how the sausage gets made (perhaps literally). 

“Turn the camera around on things you already do,” shares social media expert Rachel Karten This will entice customers not only to try out your offerings, but to replicate the content on their own platforms as well. 

In contrast, a professional office, like an accountant or small healthcare practice, could benefit from YouTube, with its longer run time, to share a deep-dive on a tax form or detail how a complicated procedure is done safely: for example, like my dog’s beloved veterinary practice recently did on comprehensive oral treatments for their pet-patients.

Once you’ve invested time—and, possibly, money—on your video content for TikTok or YouTube, where else can you use it? Don’t forget about also hosting these videos on your homepage or online shop. This will grow your web of engagement further, directing website viewers to your social pages for a like or follow, while showcasing your brand’s authenticity at the same time.

An added perk of embedding the videos you make for social onto your blog posts or business websites: it helps boost your Google search rankings by increasing the on-page time visitors spend on your site.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Read more about using social media in your small business:

https://www.lendio.com/blog/facebook-instagram-small-business-social-media/

https://www.lendio.com/blog/connect-customers-social-media-tactics/

https://www.lendio.com/blog/social-media-small-business-get-started/

Women own 42% of all U.S. businesses, have 9.4 million employees, and $1.9 trillion in revenue, according to findings by the National Women’s Business Council (NWB). But even though they’re now slightly more likely than men to start businesses, women continue to face unique challenges in access to financing. According to the Federal Reserve Banks Small Business Credit Survey, women-owned businesses apply for financing at similar rates to businesses owned by men but are less likely to receive the full amount they sought (43% vs. 48% of men).

About business loans and financing for women-owned businesses

The good news is that business loans for women aren’t out of reach. There are several loans women can use to run and grow their businesses, whether they need a source of short-term working capital or funding for a large-scale investment.

Microloans for business owners

Microloans are what they sound like: small loans.

These loans are typically much smaller compared to the other loan options discussed so far. They can be a good fit for owners who:

• Haven’t been in business very long
• Have smaller annual revenues
• May not be able to qualify for other business loans, based on their credit
• Don’t need as much financing for their business

A microloan is worth considering for home-based business owners with smaller operating costs or mobile business owners, like food truck operators or DJs.

Microloan programs

Both for-profit and nonprofit organizations offer microloans to women, as well as minorities, and other business owners.

SBA microloan program

The SBA’s microloan program offers up to $50,000 in funding for qualifying businesses. According to the SBA, the average microloan is $13,000. The maximum loan repayment term is six years, and interest rates range from 8% to 13%.

You could use it to:

• Meet your working capital needs to cover initial expenses
• Buy inventory or supplies
• Outfit your business premises with furniture or fixtures
• Buy necessary machinery or equipment

The only thing you can’t use a SBA microloan for is refinancing existing debt or purchasing real estate.

Securing an SBA microloan

Obtaining an SBA microloan follows a specific process. Here's a summary of the steps involved:

1. Identify an intermediary lender - The SBA doesn’t provide microloans directly. Instead, they partner with intermediary lenders, which are usually nonprofit organizations. You can find a list of these organizations on the SBA’s website.
2. Prepare your business plan - Before you apply for a microloan, you’ll need to prepare a comprehensive business plan. This plan should include details about your business, your market analysis, and your organization. It should also include your management structure, product line or service details, marketing and sales strategy, and financial projections.
3. Gather necessary documents - Be ready with your legal documents, business and personal bank statements, balance sheets, income tax returns, and credit report.
4. Submit your application - Apply directly to the intermediary lender. Each lender has its own application process and requirements, so it’s crucial to review these details on their website or contact them directly.

Accion

Accion is a nonprofit that offers up to $50,000 in microloan funding to brand-new and established women-owned businesses. The amount you can borrow depends on which state your business is located in.

Kiva

Kiva is a nonprofit that offers crowdfunded microloans of up to $10,000 with no interest. Repayment terms stretch up to 36 months. The program operates on a peer-to-peer lending model, whereby individuals invest as little as $25 in a borrower's business. Kiva U.S. enables entrepreneurs to leverage their community for the first 25% of the loan during a private fundraising period. After reaching this threshold, their campaign is opened to Kiva's wide network of lenders worldwide. These loans—which have a repayment term of up to 36 months—can be used for a variety of business-related expenses, such as buying inventory, hiring staff, or purchasing equipment.

Grameen America

Grameen America is a nonprofit microfinance organization that provides small loans to women who live below the poverty line in the U.S. They offer microloans ranging from $2,000 to $15,000. Established by Nobel Peace Prize laureate Muhammad Yunus, the organization follows a peer group model. This means that when a woman receives a loan, she must form a group with four other women who will also receive loans. The group meets weekly for financial training and to make loan repayments.

LiftFund

LiftFund is a nonprofit organization that provides extensive small business support in the form of microloans, larger loans, and business education. Their microloan program offers up to $50,000 for startups and up to $1 million for established businesses. The interest rates are competitive, and LiftFund prides itself on providing loans to those who have limited access to capital from traditional sources.

Microloan eligibility requirements

As with any other loan, take your time to review your financial position, the interest rate, repayment terms, and the minimum requirements to qualify.

To qualify for a microloan, business owners typically need to meet certain criteria. These might vary depending on the lending organization, but here are some common requirements:

• Good credit score - Lenders often look at your personal credit score as an indicator of your financial responsibility. A good credit score can increase your chances of securing a loan.
• Business plan - Most lenders require a comprehensive business plan that outlines your business operations, target market, financial projections, and marketing strategy.
• Proof of income - You may need to provide proof of a stable income, demonstrating your ability to repay the loan.
• Collateral - Some lenders may ask for collateral to secure the loan.
• Training or counseling - Certain programs require you to participate in business training and planning sessions before granting the loan.
• Legal documentation - Be ready to provide legal documents relating to your business, such as your business license, incorporation documents, and any lease agreements or contracts you have.
• Business age - Some microloan programs cater to newer businesses, while others might require your business to have been operational for a certain period of time.
• Residency - Many programs require borrowers to live in a specific area or region to qualify for a loan.

Applying for a microloan

Applying for a microloan involves a series of steps that are generally similar across different lenders, with some minor variations.

1. Identify your needs - The first step is to identify your funding needs and how a microloan can help fulfill them. Consider the amount that you'll need, how you plan to use the loan, and how you will repay it.
2. Choose a lender - Next, research various microloan lenders to find one that suits your needs. Consider factors like the loan amount, interest rates, repayment terms, and the lender's reputation.
3. Prepare a business plan - Most lenders will require a business plan that outlines your business model, forecasts your revenues, and demonstrates how the loan will be used to grow your business.
4. Compile necessary documentation - Gather all necessary documentation. This typically includes financial statements, tax returns, and personal identification documents. It's also common for lenders to ask for a credit report.
5. Complete the application - Complete the lender's application form. This could be online or in person, depending on the lender. Be sure to provide detailed and accurate information.
6. Wait for approval - After submitting your application, there may be a waiting period while the lender assesses your application. During this time, they may ask for more information or clarification on your application.

Remember, every lender may have slightly different procedures. It's always best to check with your chosen lender for specific instructions on their microloan application process.