5 Financial Risks to Starting a Business

In order to gain the financial rewards of starting a business, you have to be willing to take some risks

As the economic climate cools off from recent budget changes, many individuals are taking control of their own earnings and starting a business. For many entrepreneurs, there are many challenges to starting a successful business. You have to be prepared mentally and financially. Once you have the right plans and mindset, a new venture can still present many financial struggles. After all, cash flow is one of the most common reasons for startup failure. If you want to be successful, pay attention to the following financial risks that come along with your new self-employed role.

Giving Up Your Current Job

When you have a steady job, your financial risks are very low. You can rely on your paycheck to come in regularly and you know what to expect. Starting a business means that your stable income may disappear, especially if you are going at it full time. This is a huge financial risk that entrepreneurs face. It is probably one of the most uncomfortable parts of going out on your own. According to DeMers at Entrepreneur, some entrepreneurs will lower the risk by having another job or career they can resume if the business doesn’t work out. In any case, leaving a regular paycheck behind is a major leap.

Securing Business Funding

Getting started, you will need a strong financial backing to get your business going. If possible, you should try to bootstrap your business rather than raising capital. However, it can be really tough to use only your capital if the business requires thousands of dollars in infrastructure alone. In these cases, securing business funding can be a major risk to you the entrepreneur. You may have to put up collateral, assets or equity to get the funding your business needs. Unfortunately, if things don’t go the way you planned, it could be very difficult to secure the necessary funds, posing a risk to the business.

Commercial Or Industrial Space

While many entrepreneurs are starting digital companies, they still need plenty of office or commercial space. Here, the renting charges pose another risk for the owner. Typically, commercial landlords want their tenants to sign longer leases. You will be lucky to find a flexible landlord who is willing to work on a 1 year lease with favorable terms. When you are just starting out with the business, you could end up with a commercial space lease that is still active even if the business is not. You should carefully account for the space required and risks that come along with signing long term leases of 5-10 years or more.

Buying Inventory or Raw Materials

Next, you will probably need some sort of equipment, inventory or raw materials to run your business. These purchases can become a significant financial risk. If you spend too much money into inventory or materials that do not get sold, that cash could get stuck in the business. When too much money gets held in inventory, it could effect the entrepreneurs ability to pay payroll, rent or other operational costs. Surely, you will want to lower this risk by taking purchases and procurement very seriously and stick to a budget.

Personal Liability On Debt

If you decided to take on debt for the business at any point, you could be personally liable to for the credit card charges, personal loans or other financing agreements. If the business fails to cover these expenses, you could be held personally liable. These expenses can be tough to keep up with an cause huge amounts of stress. According to Philadelphia bankruptcy lawyer David M. Offen, “Debt can be overwhelming when you are receiving multiple contacts from creditors and repeated collection calls.” This is a financial risk that comes with business ownership and you should plan to pay back any debt associated with you and the business.

In order to gain the financial rewards of starting a business, you have to be willing to take some risks. Entrepreneurs must manage the transition of receiving a paycheck to writing their own. They have to ensure the business gets the startup funding required while also ensuring there is enough operational funding to get things off the ground. Then, the owner has to spend capital carefully on commercial space and inventory to start selling. Meanwhile, you have to remember that any debt created needs to be paid back. If you are able to overcome these financial risks, you have a very good chance at starting a successful business and becoming your own boss.


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