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5 Ways Entrepreneurs Can Reduce Risk When Launching a Business
Launching a business can be incredibly exciting, but there’s also ample risk involved. For entrepreneurs, it’s imperative to discover ways to maximize opportunity and simultaneously mitigate risk.
5 Ways to Reduce Risk
You’ve heard the statistic before: 9 out of 10 startups fail. It’s a sobering statistic that doesn’t exactly put an entrepreneur or founder at ease. But this doesn’t mean your probability of success has to be a measly 10 percent. By implementing some of the following suggestions, you can lower risk and increase your chances of thriving for years to come.
One of the first things to consider is the type of business entity you want to use to legally protect your business. You’ll make this decision based on numerous factors, with taxation, liability, and record-keeping being the most important.
Sole proprietorship is the most common structure. But while it’s easy to manage, it offers very little in terms of protection or separation of assets. A partnership is an option if you have two or more individuals who agree to share in the profits or losses of the business. Corporations are entities that are totally separate from the founders. There are different types of corporations – including S-Corps and C-Corps – and they each require significant paperwork and legal steps.
Finally, there’s the LLC, which is the most popular legal entity for small businesses. As long as it’s managed properly, it offers some separation of assets without the double taxation that comes with a corporation.
Spend some time weighing the pros and cons of the various options in front of you. Only you can decide which structure is right for you.
It’s often debt that harms small businesses and startups. Entrepreneurs take on too much financing early on in the process and end up underwater with payments. The smarter you are with debt financing, the lower your risk will be.
Small business loans are something you have to be careful with, but also be wary of loading up credit cards. If you do use credit cards, read the fine print and compare your options.
“If a business card offers ‘commercial liability,’ it means the business is liable for all debt. If the card offers ‘joint and several’ liability, it means both you personally and the business are liable,” CardGuru explains. “The former option is a great option for lowering your personal risk when setting out in a new business.”
When you’re first starting out, the goal is to keep things lean. This means you don’t throw money at expenses that aren’t critical to the growth of your business. And while it’s easy to view insurance as an optional expense, this isn’t the case.
Securing the right insurance policies from the start will insulate you from serious risks. Every situation is unique, but at least consider general liability insurance, property insurance, errors and omissions insurance, and workers’ compensation insurance.
If it isn’t in writing, it didn’t happen. That’s the mantra of the business world. So make sure you document everything you possibly can. Airtight contracts and meticulous record keeping will protect you if there are ever any unjust claims brought against your company.
“The number-one risk for most small businesses is improper cash-flow management,” says Scott Lovingood, CEO of The Wealth Squad Inc. “Calculate every month how much money you have on hand and how long it will last if your income dries up. Also evaluate monthly your total accounts payable and the number of days accounts are outstanding because a slowdown in accounts payable will lead to cash-flow crunches.”
In addition to carefully tracking your finances, it’s important to build up an emergency fund with enough cash to cover all of your expenses for at least three months. Eventually, you’ll want to reach a point where you have an emergency fund of six months worth of expenses. This simply gives you a cushion if the bottom falls out.
Give Your Business a Chance
Launching a business is always going to come with some inherent risk. It’s difficult, messy, stressful stuff. But there’s no sense in exposing your business to more risk than it has to face. Give yourself a fighting chance by taking smart, calculated steps towards launching and growing.
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DISCLAIMER: We hope whatever you find on this site is helpful, but be cautioned that it may not apply to your own situation, or be totally current at any given time. Idea Cafe Inc. and all of its current and past experts, sponsors, advertisers, agents, contractors and advisors disclaim all warranties with regard to anything found anywhere on this family of websites, quoted from, or sent from Idea Cafe. and its related sites, publications and companies. We also take no responsibility for comments published by others on these pages.
TRADEMARKS: The following are Registered Trademarks or Servicemarks of DevStart, Inc.: Idea Cafe®, Online Coffee Break®, The Small Business Gathering Place®, Take out Info®, Biz Bar & Grill®, Complaint-O-Meter®, A Fun Approach to Serious Business, CyberSchmooz, and BizCafe.