5 Ways to Reduce Financial Risk For Your Small Business
Editor’s Note: This post was originally published in February 2019.
Has anyone ever told you that starting a business was risky? While this is true, anything in life that you do likely has some risk associated with it. So why do you do it? It’s likely because you have identified the risks and figured out how you’d reduce them. Plus, the reward surely outweighed the risk.
According to the U.S. Small Business Association (SBA), only 49.2% of businesses survive past five years. Why do so many businesses fail so quickly? For most, it’s a failure to manage financial risk.
In other words, about half of all new businesses make too little profit to cover operational expenses, and many business owners take on too much personal debt to try and stay afloat.
Fortunately, there are things any business can do to prevent its financial risks from getting out of hand. Here are five ways to reduce your financial risk and help your business succeed in the long run.
1. Create a solid business plan
A solid business plan is paramount for defining the goals, processes, and structure of your business. A good business plan can be broken up into five main categories:
- Executive Summary: Explain the specifics of your business, including the name and the type of work it does.
- Market Analysis: Review the current market to ensure there is a paying customer base.
- Financial projections: Explain how you’ll make money and how much you expect to bring in over time.
- Organizational structure: Define how your company will be organized and who will take on which responsibilities.
- Products or services: Go into detail about what you’ll sell, how, and why your business model will work.
A solid business plan can help you validate your business idea and perhaps even qualify for funding from lenders. Overall, it’s a great way to get clear on expenses and income so there’s less chance you’ll run into financial troubles.
2. Get business insurance
You insure your car, your life, your health, and your home. Why not insure your business?
Obtaining business insurance can protect entrepreneurs from the unthinkable. There are many different types of business insurance that help reduce financial risk, including:
- General liability: Covers your business against injuries and property damage.
- Product: Protects you from lawsuits regarding your products.
- Errors and omissions: Protects you in the event you leave something out of a contract or make a professional mistake.
- Premises: Protects your property.
In 2026, business insurance costs an estimated $120 to $140 a month, but it’s worth the cost if you want to reduce your financial risk.
3. Consider a low-risk business loan
During the early stages of running your business, you may not have the capital on hand to invest in profitable business practices. So a business loan can be a useful option to help you build and grow your business.
Business loans generally have low interest rates, predictable monthly payments, and flexible terms so you can pay them off quickly or over time. Having a business loan can also help you build your business credit score.
The downside is that some loans require a good credit score for approval, and some come with fees and a long wait time to receive funds. You also have to put up collateral for secured business loans, which could be in the form of your home, business equipment or other valuable assets.
Alternatively, you might consider getting a business credit card. If you don’t know how much money you’ll need to borrow, you can spend as you go with a credit card. The requirements to qualify are also more lenient with loans, and you don’t have to put up collateral.
However, business credit card interest rates can be much higher than business loans, which can make it a hardship to pay back the debt.
4. Diversify your income
Did you know that the average self-made millionaire has seven streams of income? Earning money from different products and services is one of the easiest ways to reduce your risk, and it can help you ensure you have enough money to comfortably run your business.
If your business offers a single service or product, it can be extremely risky when markets change. For example, many sit-down restaurants failed during the COVID-19 pandemic. However, those that quickly shifted to delivery and pickup services generally fared better.
Take a lesson from them and diversify your business income by offering a variety of products and services. You should also develop a back-up plan for income during the off-season.
5. Save a portion of your profits
How you manage your business income can be a key factor in your long-term success. Don’t spend every dollar you earn, or believe the myth that you have to ‘reinvest’ all of it into the business.
Instead, save a percentage of your profit. Take a set amount off the top, before you do anything else with your business income. Then, you can use it to build an emergency fund, a fund to pay your business taxes, or a buffer to supplement your profits during slow months.
About the Author: Christine Soeun Choi is an SEO associate at Fit Small Business specializing in digital marketing. Currently based in NYC, she has a background in business studies and math with a passion for business development. When not helping small business owners, Christine enjoys taking photos, exploring artwork, and traveling.
