Many people would love nothing more than never reporting to a boss again. In fact, 62% of Americans dream of one day owning their own business.
However, there’s a lot to consider when planning a start-up business.
While capitalism thrives in the U.S., it is only a select few whose businesses take off and become wildly successful and profitable.
You are completely capable of being one of those business owners.
But first, there are the financial risks of starting a business you need to be aware of before pursuing your dream.
Keep reading for an in-depth look at our top 5 financial risks of starting a business.
The Risks of Starting a Business
As suggested above, only a select few small businesses make it at all, let alone to the big league. Studies show that 30% of small business fail within their first year, while 90% of them fail by their 10th.
While the idea of being your own boss may sound appealing, it means you alone are responsible for 100% of your business and there’s no guaranteed paycheck.
There are countless risks involved in owning a business, but the personal and financial pay-off can be incredibly rewarding.
Starting a business should never be entered into lightly.
Your business loan will likely be among the biggest financial risks of starting a business.
Operating under the assumption you aren’t independently wealthy or have multiple investors with deep pockets, you’re going to need a start-up business loan.
First, it’s best if you have a good credit score before pursuing a business loan if you want banks to even consider your application. This will help things process quickly and smoothly with whatever bank you do business with.
If you don’t have good credit but have time to improve your score before applying for the loan, do so.
However, there are ways of getting business loans with a poor credit score. Keep in mind that your interest rates will likely be higher. This is what the bank gets as a reward for taking a risk on someone with bad credit.
Don’t be surprised either if you are required to place a lien on your house or another asset in the case of a secured loan. It’s the bank’s “insurance policy.”
Here are the basic start-up costs new business owners need to consider when proposing a business plan and planning for a loan.
Equipment and Supplies
What equipment and supplies will your business need to operate?
For example, if you are opening a gym, your initial overhead may be quite large, depending on the size of your gym.
Most gyms have squat racks, benches, free weights, resistance machines, and cardio equipment. You would also need to think about the front desk and any office areas.
For an office-based business, you need to think about desks, chairs, computers, printers, fax machines, copy machines, etc.
We could go on forever dissecting every business, however, the point is you need to catalog and make an inventory of everything your business will need to operate as intended.
Equipment and supplies are huge financial risks of starting a business. They are bought and paid for and you have them whether you’re in business in two years or not.
After you’ve decided what supplies and equipment you need, you’ll need to plan out what products you’re going to offer and how much you need to start with.
It’s vital to do market research to analyze the competition in your particular business field as well as what is selling. One of the most dangerous risks of starting a business is the ever-changing market.
Consumerism ebbs and flows. It never stays the same for long. Your company and your products need to be fluid and readily adaptable to whatever the market of supply and demand dictates.
Therefore, when selecting your products, be sure not to over-commit to anything.
Lastly, if you plan on shipping products or having them shipped to you, it’s necessary to add it into your start-up loan.
Large-scale shipping can be quite expensive. Makes sure you have the financial backing to get things moving.
Locking down a business space is one of the largest risks of starting a business.
Whether you decide to build, buy, or lease a business space, you are likely committed for the long haul. Even a three-year lease can seem like an eternity if you’re in the red after a year and a half.
Make this decision wisely.
Some start-up owners build a new building for their business.
This is by far the highest of all risks of starting a business. Building and business space from the ground up for an unestablished business will cost hundreds of thousands, if not millions of dollars.
Investing that much on an uncertain future can backfire horribly.
Buying a business location is financially risky as well. With a new business and the rate at which they fail, large investments such as realty should be avoided.
Once the business has been established for a few years and is doing well, then it may be a good time to consider buying a building.
As a building owner, however, you will be responsible for all utilities and building taxes.
As a new business owner, your best bet is to lease a business space.
However, there will be some risk involved. Most commercial landlords will require a 3-5 year commitment when signing a lease.
Unfortunately, if your business is failing after a year or two, you must still honor the rental agreement. Most commercial landlords are business-driven and will likely not let you out of your lease early.
Failing to pay or terminating your lease early can leave you vulnerable if your landlord chooses to pursue legal action.
When you assume a building, either owning or leasing, you will likely be responsible for the utilities. While this is a relatively low cost for business owners, everything adds up.
Most businesses require employees other than the owner or owners.
Having employees is a viable risk of starting a business and carries a lot of extra expenses. In fact, many businesses choose to hire independent contractors rather than employees.
However, not all businesses lend have the option to hire independent contractors.
Each employee you hire means one more person getting a cut of the pie. While it may be necessary to have employees, don’t over-staff your business and end up paying out more than what’s coming in.
Most businesses also pay a portion of an employee’s taxes. Depending on the number of employees you hire, this could add up very quickly.
Your business may not be large enough, especially starting out, to be required to offer benefits such as health insurance.
However, if you boast more than 50 full-time employees, you must either provide benefits or pay a tax penalty.
As stated above, one of the major risks of starting a business is the ever-changing market.
To start a business in any field, you must know your market inside and out. Otherwise, the same market will crush you and your business.
Having a successful business is about providing solutions and products people need and want. Therefore, you must know what it is people need and want.
To be competitive in our society, you must have an online presence. Research shows that 89% of consumers research a product before they buy it. If you’re nowhere to be found on the Internet, you will quickly be passed over for someone who is.
Every business needs advertising to get noticed. Unfortunately, because advertising is in such high demand, it’s also very expensive. Radio ads alone can cost hundreds to thousands of dollars a month.
TV commercials are more expensive yet, and internet ads depend on who you buy through.
Legalities and Liabilities
As a business owner, you are many new legalities you must abide by. You also have a lot more to be accountable for. Most people don’t know how to manage their books or file business taxes.
These are cyclical expenses that must be accounted for.
Business License and Registration
A small, yearly fee all business must pay is for their business license through the city. They also must register their business with the Secretary of State.
As most business owners are not qualified accountants, they generally need to pay one to file their taxes. Accountants are incredibly expensive, but it still takes a bit out of the budget.
If you hire a bookkeeper, who may also be your accountant, you are looking at a monthly fee, rather than a yearly fee.
Just because you own a business, it doesn’t mean you’re going to be good with money. Most people aren’t. In fact, regardless of earnings, 4 out of 5 people live paycheck to paycheck.
Luckily, financial advisors are around to help business owners manage their money for a fee, of course.
Additionally, you may need to hire a consultant to help you run your business. They have the expertise in marketing and management that you may lack.
Most people don’t realize how liable they become when they open a business. Some people look at businesses like pinatas – just full of good stuff waiting to get whacked out.
Any offense your business may or may not have caused can generate a lawsuit. Customers, clients, and employees all have the legal right to sue you. Whether or not they win is up to the court.
Fortunately, insurance companies are there to protect you. Most business insurance costs aren’t astronomical. However, it largely depends on what your business does.
Your Business Answers
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We help identify and resolve risks of starting a business, give advice on managing money and employees, help you decide which loan may be best for you, and everything else in between!
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