Financial Risk of Starting a Business

Starting a business can be such an exciting adventure to go on, one where you can accomplish your dreams. The problem is that there is a great deal of financial risk involved with a business startup. It can be even more difficult to start a business because small business funding can be tricky to come upon, especially with bad credit. The good news is that there are alternative small business loan options that you can have options available to you to increase your chances of success. This article will take a closer look at these risks associated with starting a business as well as some alternative funding options that you can take advantage of.

Understanding the Financial Risks of Starting a Business

One of the most important things for you to know before you get started on a business is to know what risks you will be taking financially. There is always a risk, but you may find that the financial reward for your efforts far outweigh any risks that you are taking. In this section, you can learn more about the various risks that you will be facing so that you know exactly what you can expect.

Forecasting Financials

Every successful business has a solid foundation to build upon. It’s important to have a financial forecast in place so that you can better understand the financial state of your business. This can help you avoid a major risk in your business of blind spending. A financial forecast gives you the ability to plan out your business’ financials. Without a solid foundation of financial planning for your business, things can go wrong very quickly. Then you risk running out of money sooner than you anticipated, putting your business in financial trouble.

Viability of Your Products and/or Services

A common problem that many businesses face when it comes to their startups is thinking that they have this perfect solution that everyone will love and automatically choose them. The problem with this is that not everyone will agree that this is the best solution in the world for their needs. Even the most perfect solution will come with a huge financial risk. It’s important not only to understand this major risk but also how you can minimize it.

It may take a bit of an investment, but you will benefit from performing market research. Performing market research will help you to determine whether or not your idea is actually as good as you think it is and how well it will perform with your target market. By doing this, you can save yourself a lot of money and help you ensure that your business will be successful.

Getting Business Funding

Inevitably, you will be trying to get business funding for your company especially when you are just starting out. In order to get the funding that you need, you need to actually know how much money you need. Take a clear account of the money that you need for:

• Supplies
• Hiring new staff
• Marketing needs
• Expanding the business
• Buying new equipment

Once you get an idea of what you need to buy, you then need to start looking at how much potential additional revenue that you can acquire. Businesses can either need business funding for a startup or to help them stabilize during a difficult time.

Understanding Your Target Market

There is inherent risk when it comes to your target market. While you may think this is the least risky part of your business, they do carry their own risk. This is because you have specific assumptions about your target market that may not be true. For instance, you assume that your target market is a specific group and they need your project because they settle for this other thing. These are assumptions that you base your entire business on.

The problem comes in because what if your assumptions aren’t actually correct. What if the group that you thought was your ideal customer actually isn’t? Then you are basing your entire marketing strategy on the wrong group of customers. This is another reason why you should spend some time on market research. Otherwise, your strategy won’t work for your business and you’re setting yourself up for failure.

Strategy Problems

You may have a great business plan and strategy in place that can impress your potential investors. However, the world moves fast, and you need to do what you can to keep up with these changing times. If your strategy doesn’t work for the current business world, then your strategy will fail to achieve your goals.

Risks with Your Reputation

Businesses rely on their reputation to succeed. This can make things particularly tricky for those business that are just starting out. On the one hand, people are always willing to try out a new company to see if their products or services are better than the ones that they are currently using. However, there may be some expectations that customers may have of you, which can also hurt you especially if you don’t meet these expectations.

If at any point during the early stages of your business there is some negative experience for the customer, this can significantly impact your business. This can be made even worse if the customer shares this negative experience all over social media or online. A bad reputation can destroy your business. If something does happen, you will need to create a strategy to repair your reputation quickly before it gets worse and costs you even more money.

Other Things to Consider with Risks

Entrepreneurs don’t get to where they are without taking risks. When you think about some of the most prominent business leaders today, they faced a lot of risks and overcame them. It’s important to know about calculated risks. Taking these calculated risks are important when it comes to starting and running a business. These are the risks where you strive for going big, but you do know what you are getting into before you jump in.

Entrepreneurs should understand that there are 5 kinds of risks that they will take as they launch their business. These risks include:

• Founder Risk

This type of risks considers who the founders are, whether or not the founders get along, and how the finders are going to work with the company.

• Product Risk

This takes into account the team of engineers that creates new product for the business and how they will recruit other engineers for the product.

• Market Risk

This type of risk is focused on which problem you are trying to solve with the product being created and how the customers will react to your product.

• Competition Risk

This risk refers to how you stand out from other similar companies within your industry.

• Sales Execution Risk

With this risk, you are looking at how you can sell your product to the customer by showing them that you have a solution for a problem that they may be having.

Different Options for Alternative Business Loans

Now that you understand about the different risks associated with launching your business startup, it’s time to inform you about the different business loan options that you can choose from. Needing money at some point for your business is inevitable. It can be hard to find the funding that you need, especially when you try to turn to traditional lenders for your funding. In this section, you can get a closer look at some of your funding options so that you can find the right one for your business’ needs.

About Startup Loans

Small business startup loans are specifically designed to give newer companies the working capital that they need. There are some things that you need to know about these loans to help you better understand them.

• Startup loans can range between $500 and $750,000 for new businesses. You should be aware that if you are trying to secure a loan on the larger end of this spectrum, you need to present a solid business plan to the lender. You need to have a clear plan and explanation to offer a lender the describes when you plan to start making money, how you plan to make this money, and what makes you stand out from the competition.
• The terms for these loans can range between 1 and 5 years. It’s important to know that if you have this loan, it can be more difficult for you to get another loan while you are trying to pay this loan off.
• You will typically have fees associated with these loans.

There are some advantages and disadvantages that you need to consider when it comes to these loans. One of the best advantages is that you don’t have to give up any equity in your company, which means you are not sharing ownership as you would with an investor. Another major benefit is that when you pay back your loan on time every month, you are building up your company’s credit. With a higher business score, you can improve your chances of securing another type of business credit if you need it in the future.

One of the disadvantages is that you will likely have a higher interest rate for a startup business loan than you would if you were a better established business. Whether or not you have higher interest rates can depend on a wide variety of factors, such as your personal credit score.

Another disadvantage is that you need to personally guarantee the loan. This means that you are going to be responsible for any debts and fees associated with the loan and you will be held liable if you default on the loan. You may also need to offer up collateral for this loan, such as you home, depending on how much you are trying to get a loan for. What that means is that if you default on your loan, you could potentially lose your home.

These are all important things to consider when you are looking at your different loan options.

Business Line of Credit

Another popular option that businesses choose is a business line of credit. This is a unique option for business funding when compared to some of the other options that you can choose from. Generally, business loans are taken out using the large sum that you need for your business. You then pay interest on that large sum. You may get short-term funding for a sudden expenditure that you didn’t plan for or a long-term one to help you grow or get through a difficult time in your business.

A business line of credit can work in a similar manner to a credit card. What this means is that while you have access to a specific amount of money, you only have to make payments based on the different options that you have used. So if you have a business line of credit of $10,000 and you’ve only used $1,000 of it, you are only paying back the $1,000.

There are some things to know about this type of funding:

• Business lines of credit can vary in range between $1,000 and $1 million.
• The repayment term for these loans can also vary from 6 months to 20 years.
• You can often get a lower interest rate on business lines of credit than you can get with other types of funding.
• The lender is who will decide on how much money you can have access to with your business line of credit. You don’t necessarily need to use all of this money at once, but sometimes you will have a minimum withdrawal amount that you need to follow.

Business lines of credit do come with requirements that you are expected to meet in order to qualify for these types of loans. These requirements include:

• Minimum of 2 years of experience operating a business.
• Collateral can be in the form of accounts receivables, inventory, and real estate.
• Proof that your business is profitable and have the revenue to pay off your loan.

Just because you are a startup, that doesn’t mean that you don’t have the ability to get a business line of credit for your business. There are lenders that specialize in getting new businesses or businesses with bad credit a business line of credit.

Other Alternative Funding Options

When you are in business, you need to know what all of your business funding options are. This can be especially true since some business startup loans may bring unexpected fees and expenses that you may not realize. These things can ultimately limit your business in the long-term. This is why some people end up going with alternative loan solutions. You have other options to consider as well. This section will take a brief look at some of your other loan options.

Business Credit Cards

You do have the option to get a business credit card. This is only really a good idea if your business expenses are not more than $10,000. The goal is to only spend as much as you can pay back before you get an invoice with any interest rates. There are some benefits that you can enjoy when you take an option like business credit cards. This includes being able to accrue awards through using the business credit card, such as earning miles or getting cash back.

However, you should be aware that business credit cards do have a higher interest rate than you would find with a business line of credit. But, if you can pay off the amount that you charged without accruing interest, this can be even cheaper than you think

Angel Investor

These days, young startups do have other options that they can consider: an angel investor. An angel investor is someone who will give you money in exchange for some equity in the business. You do have to be very careful when you choose an option like an angel investor because these investors may end up owning more of your company than you may think/want them to. You should avoid this option if you want to retain complete ownership of your business.

SBA Loan

Whether your business is just starting out or you are struggling with any type of financial imbalance in your business, you do have the option of applying for a grant or startup loan for your small business from the SBA.

SBA loans are popular choices for businesses. The goal of this group is to work with a variety of organizations in order to offer funding to small businesses. In addition to offering loans and grants, the SBA also offers grants for the purposes of research and development, which benefits any businesses who are looking for these resources.

Conclusion

It’s important to know what to expect when you are starting a business, however sometimes it can be worth the risk. With the right funding and knowing the risks and how to overcome them, you can achieve your dreams of having your own business.

A good place to start to discuss your requirements and needs would be to contact the South Florida Funding Group, an alternative funding source for securing a loan - call them today: 786-544-2700.