The Step-By-Step Guide To Starting And Funding A Tutoring Business
The news cycle is full of hype about the “knowledge economy” but often light on details about how the average person can catch a piece of the tutoring action. Do you have a skill you’ve carefully honed over the years — or even one you have accidentally cultivated through repetition at your job? Don’t have state certification and six years of college handy? No worries; you don’t have to have an MA in education to be an effective teacher. One of the more accessible points of entry to a career in education is to teach those skills to other people via the increasingly lucrative tutoring industry.
Have you considered starting a tutoring business? Tutoring may be one of the easier avenues to make a little cash in the knowledge-selling economy, but expanding a part-time coaching gig to full-time, lucrative business can take a surprising amount of planning and resources. Not sure where to start? We’ll walk you through a step-by-step process for planning your tutoring business. We’ll also give you some ideas for where you can turn for funding when you need it.
Ready? Let’s go!
Table of Contents
- Pick A Tutoring Niche
- Choose A Business Location
- Create A Business Plan (If You’re Going Big)
- Calculate Starting Costs
- Funding Options For Tutoring Businesses
- Register Your Business
- Separate Personal And Business Finances
- Choose An Hourly Rate
- Bolster Your Web Presence
- Advertise Your Business
- Final Thoughts
Pick A Tutoring Niche
Life is full of paradoxes, but one key part of thinking big is to narrow your focus. Creativity is as informed by limitation as it is by possibility.
As you would when starting any kind of business, think about where you can add value and what problems your skill set can solve. Are people in your area already doing what you’re planning to do? Is there an X-factor you could offer? A different spin on the familiar? Or is there a niche that’s unserved or under-served, particularly in your local area? For that matter, does your area have needs for specific skill sets?
Don’t have the skills or the local demand to create a flute tutoring business?
You can always fall back on subjects that are in high demand. Languages. Writing. Math. Science. And remember, each of these subjects can be broken down farther into sub-categories like algebra, chemistry, conversational Spanish, etc.
Another safe approach is to tutor students who are studying for standardized tests like the SATs, GREs, and LSATs or even trade certification tests like CompTIA A+ for IT technicians. The possibilities aren’t quite endless, but they are numerous.
Choose A Business Location
One of the great things about tutoring is that you can do it just about anywhere: at a dedicated business site, at a college library, at a coffee shop, at your home, or remotely over the internet.
Early on, your choice of location may not be critical–you can tailor your work environment to meet your own needs and the needs of your clients. Obviously, some of those options will disappear once your business gets large enough–your local coffee shop may or may not appreciate you using their space to run your business–so you’ll want to have a growth strategy in mind if you’re planning on turning your business into a tutoring empire down the road.
At the same time, you’ll want to avoid spending more on overhead than your business strategy requires. If you don’t need a brick and mortar space or a fancy interactive website right away, it may be best to hold off on those investments while you build your brand and reputation.
You’ll also want to consider the demographics of your clientele. Are they easily distracted teenagers who may have a hard time concentrating with a lot of background noise? Are they older adults who aren’t as tech-savvy as you are? Are they dependent on public transportation or parents to get to you? Does your subject matter require extra space for demonstrations? Are you working with clients with learning or physical disabilities? Are you going to need WiFi?
Keep all of these factors in mind when you’re considering a location for your tutoring business.
Create A Business Plan (If You’re Going Big)
If you’re going to be tutoring as a side gig, you can probably skip this part, but it’s not a bad exercise for anyone to try, even if they aren’t planning to incorporate anytime soon.
A business plan is simply a written, organized description of your planned business and business strategy. It’s your vision of how your business will develop, operate, and finance itself. It can also help show prospective financiers and grant-money sources that you’re organized and serious about your operation.
You can find a lot of guidance online about how to organize your business plan. Likewise, your local chamber of commerce and government economic development agencies (and similar organizations) often have resources you can tap.
A typical business plan includes the following:
- Executive Summary
- Company Description
- Market Overview
- Sales & Marketing Strategy
- Operating Plan
- Organizations & Management Team
Calculate Starting Costs
Once you have a basic idea of how your business will operate, it’s time to calculate your starting costs. Does your subject require materials, teaching aids, or similar items? Are you renting a workspace? Are you paying employees or subcontractors? Shelling out for a web host? Purchasing hardware or software? Buying insurance?
Some of these costs may be trivial enough to finance out of pocket, while others may require additional effort. As a new business owner, finding funding can be especially challenging. Many traditional sources of funding, bank loans in particular, usually aren’t available to businesses that are newer than two years old.
Funding Options For Tutoring Businesses
So what do you do if you need money? Here are some options:
Obvious? Maybe, but tapping your personal savings has distinct advantages over going into debt. You may be accessing your rainy funds, but you won’t be losing additional money on interest payments.
Of course, you are taking a risk using your own money to finance your business. If your business fails, you’ve effectively lost that money. For that reason, and as a general best practice, it’s a good idea to separate your business finances from your personal ones.
Tap Your Support Network
Another option, especially if you don’t have much in personal savings, is to ask friends and family for a loan. Unlike a private lender, your support system probably isn’t trying to make a profit off of you.
Keep in mind that this comes with its own risks. You may stress your relationships, especially if you aren’t able to pay back these so-called friendly loans quickly. One way to avoid this is to formalize any agreements you make with friends and family so that everyone fully understands what they’re getting into and what the expectations are. You may even want to draw up a formal contract that outlines any expected payments and return on investment.
One of the easier–and riskier–ways to fund your startup expenses is with personal or business credit cards (you don’t actually have to own a business to get a business credit card). Credit cards offer a lot of flexibility and convenience when it comes to making purchases. Even better, many credit cards offer reward programs that can actually save judicious users money.
However, keep in mind that credit cards carry very high interest rates on any balances you carry from month to month. Most business credit cards — and all personal credit cards — offer a grace period of at least 21 days. Purchases that you pay off within that window do not accrue interest. This makes credit cards ideal for purchases you can pay off quickly, and problematic for ones that you can’t.
Note: Avoid taking out cash advances on your cards unless absolutely necessary. They come at a very high cost.
Recommended Option: Chase Ink Business Cash
Chase Ink Business Cash Annual Fee: $0 Purchase APR: 15.49% - 21.49%, Variable
Chase Ink Business Cash
15.49% - 21.49%, Variable
Business credit cards often have aggressive rewards programs, but rarely will you find one that offers 5 percent cash back on qualified purchases. And since that includes office supplies, the card’s not a bad fit for tutoring.
There’s a $25,000 cap on the higher rates of return, but with no annual fee, it’s quite a bargain.
Recommended Option: Capital One Spark Classic
Capital One Spark Classic For Business Annual Fee: $0 Purchase APR: 24.74%, Variable
Capital One Spark Classic For Business
If you don’t qualify for the Chase Ink Business Cash, Capital One’s Spark Classic is an easy-to-qualify-for, no-frills cash back card that can help you save money on purchases while building up your credit.
You’re only getting 1 percent back on purchases, but it’s not a bad place to start if you’re coming off a year or two of hard luck.
Traditional business loans may not be an option for new businesses, but you can often use personal loans to cover some of your startup expenses. Since you don’t have to worry about business-oriented qualifying factors like the amount of time you’ve been in business, these loans can be easier to get when you’re first starting out.
The downside is you won’t have the liability protection you’d theoretically have if you applied as a business. You may also be more limited in terms of the amount of money you can take out.
Still, if you need a little money to get started and don’t have funds on hand, it’s not a bad option.
Recommended Option: Lending Club Personal Loans
Lending Club is a good option for individuals who may not have the strongest credit, but have a good debt-to-income ratio. The borrowing range is fairly narrow at $1k to $40k, but when you’re just starting out you don’t want to go too deeply into debt anyway. You’ll have three-to-five years to pay it off, which makes it fairly manageable when you’re first starting out.
Recommended Option: Lendio
If you’re just entering the alternative loan market for the first time, it can be pretty overwhelming. Lendio takes some of that burden off of you by allowing you to effectively apply to their whole network of lenders with one application.
Recommended Option: Upstart
Another solid option for non-traditional borrowers is Upstart. So long as you have fair credit (620+), a stable source of income, and live in a state other than West Virginia or Iowa, there’s a pretty good chance Upstart will work with you.
Flexibility is the name of Upstart’s game. How so? They’ll use non-traditional means to get a picture of your credit worthiness and they’ll allow you to select between different payment schedules. And with three to five years to settle your loan, you won’t have to worry about paying it off right away.
Need more options? Check out our feature on startup loans.
Nothing’s better than “free” money, and grants might be the closest thing to that in the real world. Grants usually require a fairly involved application/writing process and, as you might expect, are often highly competitive. So while you may not have to worry about interest with grants, you do want to factor in the amount of time you have to spend trying to get a grant, especially considering there’s a high chance that you won’t be selected for the grant.
On the other hand, being awarded a grant comes with some prestige that you can then use in your marketing efforts. And it is “free” money, after all.
If you need some help figuring out where to look for grants, check out our feature on the topic.
Not your neighbor-with-the-nice-car Rob, but Rollovers as Business Startups. If you haven’t heard of ROBS, don’t feel bad. They’re extremely niche products for entrepreneurs with retirement accounts like 401(k)s.
For a fee, a ROBS provider allows you to use money from your retirement account to pay for startup costs without incurring the tax penalty you normally would by tapping those funds early.
As is the case with personal savings, you are risking your own money.
ROBS will be overkill for most new tutoring businesses, but if your startup costs look like they’re going to pile up, keep them in mind.
Recommended Option: Guidant Financial
If you’re in the market for a ROBS, it’s worth checking out Guidant Financial. If your retirement account has at least $40k in it, you can roll over up to 100 percent of your funds.
Register Your Business
This part is technically optional, but if you’re planning to build your tutoring business into more than an occasional source of freelance income, you should probably register your business.
If you do nothing at all, your business will default to a sole proprietorship (or a partnership, if you’re starting it with someone else). This essentially means that you’ve started a business with your own name. Sole proprietorships have the advantage of being cheap and easy to start. Your taxes will also be easier to file (and lower) than they would generally be with other forms of incorporation. Keep in mind, however, that for liability purposes, sole proprietorships and the individuals behind them are essentially one and the same. While it won’t separate your personal and business finances, you should consider filing a DBA (Doing Business As) with your local county clerk. This will allow you to legally operate your business under its own name (Uber Math Works as opposed to Barry Holgram, for example).
Other forms of incorporation will require a bit more work and come with their own advantages and disadvantages. This is where the business plan we talked about earlier will come in handy, because you’ll need one if you’re going to incorporate. Keep in mind that incorporation comes with costs and additional responsibilities, so make sure you’re at the point where it makes sense for your business.
Here are the most popular ways to incorporate:
- Limited Liability Corporations (LLCs): If you’ve seen LLC after a corporation’s name, you’re dealing with this type of company. LLCs offer limited liability protection for their owners without the full complexity of a corporation. Each state has its own rules for how to start and maintain an LLC, and you don’t necessarily have to register your LLC in the state where you’re doing business (although you’ll generally want to). LLC owners report their business earnings and losses on their personal taxes.
- C-Corp: This is the “basic,” default form of incorporation. Shareholders are considered the owner(s) of the company and receive limited liability protection; however, the business decisions are made by corporate officers who may or may not be shareholders. The corporation is taxed separately and shareholders pay income tax on dividends. To form a C-corp, you’ll file articles of incorporation with your state.
- S-Corp: S-corps are similar to C-corps in most ways, but come with a few additional restrictions: you have to have fewer than 100 shareholders and they have to all be U.S. citizens or residents. Unlike C-corps, profits and losses are reported on personal taxes, not unlike an LLC. In addition to filing articles of incorporation, you’ll also need to file IRS Form 2553.
Separate Personal And Business Finances
Even if you’re going to run your tutoring business as a sole proprietorship, you should take steps to separate your business finances from your personal ones. A separate business checking and/or savings account can save you a ton of headache when it’s time to pay your taxes. And even for your own edification, it will make your profits and losses much easier to track.
Choose An Hourly Rate
Figuring out how much to charge for your tutoring services can be one of the more challenging parts of getting your business up and running.
A good place to start is to do some research on the prevailing rate for similar services in your area and then figure out a strategy for your business. Are you going to try to undersell the competition? Charge more but offer something your competitors don’t? You can glean this information often from your competitors’ websites or by checking out third-party sites that do regional salary comparisons for different industries. You may also want to speak to local colleges and schools about how they handle independent tutors.
It sounds obvious, but you don’t want to charge so little that you’re breaking even, or even losing money, on your gig. Take into account the transportation costs of meeting your clients, any money you’re spending on coffee, etc. And be sure to deduct those expenses when it comes time to pay your self-employment taxes!
Bolster Your Web Presence
Word of mouth can still go a long way in the tutoring business, but these days there’s really no way to avoid the necessity of building a strong digital presence.
It never hurts to have a sleek, attractive website. Indeed, it can make your operation look professional as well as help build hype for your services. Luckily there are user-friendly and cost-effective ways to build a website.
That said, a website is not the only way to use the internet to build up your tutoring business.
Remember that the web is, itself, a medium for instruction and tutoring. You may want to consider offering some freebies on YouTube, for example, to build up your reputation. In addition, free services can function as advertisements for your paid services. Just make sure you don’t make your paid services extraneous.
Social media strategy is too complex to go into in great depth here, but making posts that are fun to read and interact with is a good place to start.
Advertise Your Business
In addition to what we covered above in web presence, you’ll also want to get your name out there in other ways. If you’re just starting out, you’re probably not looking at expensive media buys on TV, radio, or even your local newspaper.
Let your network know what you’re up to so they can spread the word about your new tutoring. Make a Facebook page. Get yourself a Twitter account. Offer free consultations with curious parties. Even cheap, low-tech solution like flyers with tear-off tags can be powerful if you post them in the right places.
Does helping someone grow and learn while earning money sound like a dream job? Tutoring can be one of the more rewarding and flexible businesses you can get into. But while the demand for expertise is often high, you’ll still want to approach the industry with a strategic mindset. Take your time, narrow down your niche, and build your reputation and tutoring can turn into so much more than just a side gig.