Launching a new business comes with a certain amount of risk. You’re investing a lot of time, effort and money into this venture, and there’s no guarantee it will pay off. Fortunately, there are a number of ways business owners can reduce their risk and insulate themselves from financial trouble.
1. Plan ahead
The first and most important way to reduce risk of all types—financial and otherwise—is to plan your startup carefully. There’s no such thing as being “overprepared” for a new small business. Every minute you spend conducting market research, improving products and honing your skills improves your chances of success.
Pay special attention to your business plan and budget. These documents will serve as a roadmap for your startup, based on the research and work you’ve put in. Straying from the business plan and budget could spell disaster, so rely on them when things get complicated!
2. Separate personal and business expenses
It can be tough to separate personal and business expenses when you’re a one-person startup. However, doing so is critical to insulating your personal assets from risk.
The first step usually involves establishing a business structure, to reduce your personal liability. Using this structure, your business can take out loans or other debt. Keep separate bank accounts, credit cards and other financial tools to ensure there isn’t any crossover.
Working with professionals in the areas of financial planning, tax, legal and other areas will out your business on the right path from get-go.
3. Use smart debt strategies
Most small businesses are unable to avoid debt to some degree. While some are buoyed by a loan, others might only incur a small amount of debt to cover certain costs. Regardless of how much debt your business requires, it’s crucial that you accrue smart debt.
For example, it’s generally a bad idea to max out personal or business credit cards to cover startup costs. Credit card debt usually has a high interest rate, which can compile quickly if you don’t pay off your debt soon. Maxing out credit cards also leaves you without funds in an emergency, and it could hurt your credit.
Instead, small business owners would do well to explore loan options like SBA loans and other term loans. These debt strategies involve much more favorable terms, including long-term repayment options and lower interest rates. Even if you require a small amount of funding, applying for a micro-loan will typically work out better for your company in the long run.
For some, the best option is no debt at all through the avenue of 401(k)ROBS Rollover funding to fund their new business startup and expenses. This process uses equity, not debt, and is entirely IRS approved for for-profit businesses.
4. Diversify income streams
Everyone’s heard the saying, “Don’t put all your eggs in one basket.” This phrase is especially true for startups. Businesses that invest heavily in only one product run the risk of becoming obsolete—particularly if they’re banking on a trend. Consumer needs and behaviors are constantly changing, and small business offerings need to be able to keep up.
While most businesses focus on one specific product or service area, there are still ways to diversify. Consider how many customer segments your product line serves. Could another group use your products in a different way to meet their needs? Can you expand or adapt your products in order to serve new customer types? Diversifying in this way insulates you from risk as the market changes. If one customer segment moves away from your products, your business won’t be left without sales!
Also think about the ways your business can grow in the future. You may not have the capital to invest in multiple options right now, but you should have a plan for investments down the road that can guide your immediate decisions.
There’s no way to eliminate risk completely when starting a new business. You can only take steps to minimize it through careful planning and consideration. Working with a business financial expert like Tenet Financial Group can also help. Our team will connect you to the funding products that make the most sense for your business’s needs. Contact us today!