5 Tips on Reducing Financial Risk For Your Business

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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.
The same can be said about your business. The Bureau of Labor Statistics states that 50% of small businesses survive the 5-year mark. Lack of finances is one of the most common reasons why businesses fail and this can be attributed to financial risk.
Financial risk refers to a company’s ability to manage debt and profit to sustain enough revenue to cover operational expenses. If you want to reduce your financial risk when running your business, here are 5 tips to help.

  1. Get a Solid Business Plan

    A solid business plan is paramount when determining the goals, processes, and structure for your business. A 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)
  • 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
  • Products or Services (go into detail about what you’ll sell, how, and why it 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 of a chance you’ll run into financial troubles.

  1. Get 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 you can consider to 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)
  • Premises (protects your property)

Business insurance can cost you anywhere from $584 to $1,281 per year but it’s worth the cost if you want to reduce financial risk.

  1. Consider a Low-Risk Loan and/or Credit Card

A business loan can be a great option to secure funding and grow your business. During the growth stages, you may not have the capital on hand to invest in more profitable business practices.
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 strong credit score for approval and some come with fees and a long wait time for approval and to receive funds. You also have to put collateral up for secured business loans which could be in the form of your home, valuable property, business equipment etc.

Still, the right loan can do more good than bad when it comes to helping your business succeed.

You can also consider getting a business credit card in addition to (or as an alternative to a loan). 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 will also be more lenient with this option.

While business credit card interest rates are higher than with business loans, you don’t have to worry about putting collateral up and losing your home or business property if you endure a financial hardship that delays your payments.

  1. Diversify Income

This is one of the easiest ways to ensure you have enough money to comfortably run your business. The average self-made millionaire has 7 streams of income.
If your business offers a single service or product, this can be extremely risky if markets change or your customer base dies off. To keep profit flowing in, diversify your income by offering a variety of products and services and determining a back-up plan for income during the off-season.

  1. Save Some Profit

 How you manage your business income can be a key factor in your long-term success. Don’t spend every dollar you earn or claim you have to ‘reinvest’ so much money back into the business each month.
Instead, save a percentage of your profit and keep track of your income to make sure you’re able to meet all your expenses and cover taxes.
Take your savings percentage off the top before you do anything else with your business income. Use it to build an emergency fund or a buffer to supplement during slow months and financial hardships.

Bottom Line

Running a business can be seen as risky, but you have some control in terms of lowering the financial risks. The key is to start protecting your business and lower risk from its conception. Use these 5 tips to help you create a thriving business that lasts long-term.

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.