Financial Risk of Starting a Business

It’s often said that starting a business comes with a smaller risk than ever before. As long as you have a laptop, you can start a business anywhere and enjoy success in very little time. However, this doesn’t mean that the process of starting a business is entirely risk-free. In particular, it has certain financial risks that you need to know before taking the plunge in your business startup.

In this guide, we’re going to talk about some of the biggest challenges that others in your position have encountered when launching a business. From here, we’ll also address some fantastic solutions. We don’t want to scare people away from their dreams, so these solutions hopefully help you to find the right solution!

Biggest Financial Challenges When Starting a Business

To start, what are the biggest financial challenges that you’re likely to face in the opening weeks, months, and years?

Product/Service Risks

You spend months developing a product, work on the packaging, create a website, and work out a shipping system. Now, it’s time to allow people to purchase the product or service. But what if this doesn’t happen? One of the biggest financial risk of starting a business is that consumers simply aren’t interested in your business.

You might have dreams of selling lots of units and becoming a millionaire, but the people will ultimately decide whether this dream comes true. If nobody buys the product or service, you’re left in a hole. Not only have you already spent lots of money, but you also have stock somewhere that you need to shift.

How do you prevent this problem? Don’t just assume that everybody will want your product or service. Do as much market research as possible to ascertain the public’s passion for your idea. Before you spend anything, go out onto the street, and get the opinions of your target market. It doesn’t cost anything to ask people for their opinions, whether in a physical location or online.

Does your target market need your product? Perhaps the gap exists in the market because there’s no need for the product that would fill it.

Financial Forecasting

As you’ve probably been told several times before, planning is everything in the early days. If you fail to plan, you plan to fail. However, many new business owners think that they can get by with everything in their heads. If this is your approach, just know that most sources of finance will reject your proposal without even listening to it.

Regardless of the financing method you choose, make sure you have a financial forecast. You need to understand the business’s financial forecast and how you plan to make it through the opening months…the most treacherous for any new startup business. Rather than spending money blindly, plan carefully and always understand where your sources of finance are located.

Target Audience

Although we touched on it previously, another financial risk is that your target market isn’t as expected. Your business plan probably says that your target market has an interest in your topic, and therefore they will buy the product/service. Since this is a list of financial risks, you’ve probably guessed that this isn’t always the case.

Where does your target market shop? What do they spend on products and services like yours? How do they consume information? Don’t just assume that people have an interest in your niche so will naturally buy your product. You could put it into the wrong stores, charge the wrong prices, or completely get your positioning wrong.

Again, the solution comes down to market research. If you ask these questions during the market research phase of your planning, you won’t make mistakes in the launch stage. You also won’t develop a product that nobody wants, as we saw earlier, and you’ll have a full understanding of your target audience.

Business Funding

Next, another huge financial risk that comes with starting a business is funding. Too often, we see business owners start on their journey without securing lines of finance. Sadly, they assume that they can just get a bank loan or another source of finance later.

Not only is it difficult to get funding as a new business, but you also need to consider the many different options. As a new business, especially one not willing to risk personal assets, your options are limited. Also, you need to think about why you need small business funding. Are you planning to use the money for marketing, supplies, expansion, rent, equipment, staffing, or something else?

Will revenue cover future financial needs? Or will you need to secure more small business funding? Do you have contingency funds? Thankfully, you’re in the right place because we’re going to discover small business funding options in the next section of this guide.

External Threats

Of course, we also can’t ignore external threats that can affect a business. Now is the perfect time to understand how external events can affect a business because we’re all in recovery mode after the pandemic. Many new businesses owners were in your position in early 2020; they started a new business and couldn’t believe their poor luck as the pandemic gripped the world.

What’s to stop something similar from happening two months after launching your own business? Well, nothing. As a result, you need contingency funds and a plan in place to deal with external threats.

Financing Options for New Businesses

Enough of the doom and gloom, those able to overcome the financial risks have every chance of building a successful business. According to the Chamber of Commerce in the United States, a little under 99% of all businesses in the country are considered small businesses. Therefore, small business funding solutions do exist for entities of this size.

In case you needed extra motivation to make good decisions, around one in five new businesses don’t make it past the first year. What’s more, only half survive the first five years (it seems we weren’t done with the doom and gloom). As mentioned, you do have options this year though.

At the South Florida Funding Group, we offer new businesses lots of ways to obtain finance including alternative small business loans for those with bad credit. The requirements differ for each, so make sure you understand the terms before proceeding. If you have any questions, feel free to contact us today.

1. Startup Loans

New businesses aren’t exactly rare, as we’ve seen, and this is why financial institutions have developed small business funding specifically for this audience. With a small business startup loan, you can borrow between $500 and $750,000. As expected, your business plan will come under more scrutiny if you’re pushing the upper boundaries of this range.

Depending on the small business loan, you’ll repay the amount over one to five years; also, the loan will come with fees that you need to manage. When considering your options, the first thing to know about business startup loans is that you don’t have to yield equity. Often, new business owners feel as though they must give up part of their business. Fortunately, this isn’t true of startup loans.

What’s more, the fact that you may have up to five years makes it easier to pay back the loan and prevent further trouble. If you pay the loan back on time, this will improve your credit score/rating thus making it easier to secure finance in the future.

On the other hand, one drawback is the potential higher fees compared to other sources of finance. Also, alternative funding lenders will normally guarantee startup loans against personal assets. If the business cannot pay fees or debts, you will be responsible personally. In some cases, a house is a collateral (in large loans). If your business fails, the lender will take your home to make up for the fact that you can’t repay the loan.

Therefore, you need to carefully consider all the potential ramifications before signing on the dotted line.

2. Business Line of Credit

Alternatively, some choose to open a business line of credit, and this is easier to obtain because you don’t necessarily need a reason to get one. Typically, it works like a personal credit card and offers money when required (important when unexpected costs arise in a business).

Although interest rates vary, they’re commonly lower than personal credit cards. Whenever you need funds, withdraw from the account, or pay using the card. Then, pay it back before the next interest period to prevent extra charges.

Another benefit of a business line of credit is that the funding amount ranges from hundreds to $1 million. What’s more, you may have months to pay any borrowed amounts back. This being said, one of the biggest problems is that most lenders will require a business to have experience. Therefore, you won’t have access to a business line of credit immediately. Additionally, you’ll need to provide collateral while proving that you have enough revenue to pay borrowed amounts back.

3. Startup Business Line of Credit

With a business startup also requiring business lines of credit, some lenders have moved into this field to help new businesses. If you’re to choose this route, you need a specialist provider. In most cases, startups need some form of collateral to appease lenders.

4. Merchant Cash Advance

Another option with which the South Florida Funding Group can help is a merchant cash advance. As a type of alternative small business loan, you access working capital and repay the loan as a percentage of future sales. Essentially, the lender is providing you with future sales in advance. When these sales eventually come through, a percentage goes to the lender to repay the initial loan.

Over the years, this form of alternative small business loan has grown more and more popular. Especially for seasonal businesses, they get the money they need during the quiet period and then repay it when sales pick up again. Generally speaking, approval occurs within a couple of days, and you only need three months in business.

5. Equipment Financing and Leasing

If you need equipment, we recommend exploring leasing and financing. However, don’t get the two confused because they differ greatly. Available to small businesses, the main difference comes with ownership. With leasing, you rent the equipment from the supplier and pay a monthly fee. However, you don’t ever own the equipment.

On the other hand, financing is where you pay a monthly fee and the equipment itself is the security. If you fail to pay, the equipment is taken to cover the cost. The difference with financing is that you own the equipment once all payments are made whereas this isn’t the case with leasing.

Once again, the application process is fast, and you only need three months of history. With a one-page application, you’ll get the equipment you need in no time.

Other Small Business Funding Solutions

 It doesn’t stop there because the following may also suit you when starting a business:

• SBA Loans - Backed by the government, the beauty of this loan is that the Small Business Administration backs a percentage of it. Therefore, those with bad credit only need to secure a small percentage. The downside is that you need slightly more experience compared to other solutions in this guide.

• Secured and Unsecured Small Business Loans - While a secured business loan uses an asset as collateral, an unsecured business loan uses the personal credit of the business owner. Consequently, this isn’t one for owners with bad credit. Thankfully, you only need three months in business and the approval process takes just 24 hours in many cases.

Contact The South Florida Funding Group Today

As a business startup, there’s a huge financial risk that needs to be managed. If you have bad credit, it’s not the end of the road. Often, owners can achieve their dream through alternative small business loans and other small business funding instead. Contact The South Florida Funding Group today to speak to an expert and explore your options!