Small businesses fail at an alarming rate. Considering 50 percent of all startups don’t survive past the five-year mark, recognizing and mitigating risk is a wise business strategy.
The argument can be made that if everyone played it safe, there would be very few small businesses that grow into big companies like Apple, Spanx, The Walt Disney Company and Ben & Jerry’s. Yes, society at large applauds those who risk everything for a startup, but only the entrepreneurs whose businesses survive and thrive are able to take their bows. The reality is that many fail, and there is no honor in losing your home or your retirement funds over business debts.
Contrary to popular belief, you don't have to swim with the sharks or walk an infinite financial high wire to become a successful small business owner. And, not all entrepreneurs are inveterate risk takers by nature. More often than not, small business owners succeed by mitigating risks, not ignoring them. '
Here are seven recommendations to lessen the risks involved in starting a small business.
1. Don't mortgage your home or your future.
There is only one reason to mortgage your home or spend your life's savings on a business venture: All other sources of financing are unavailable to you. If multiple banks and financing sources have turned down your project, you must reconsider whether your venture is on solid ground before digging into your savings. After all, if a bank won’t work with you, something is wrong with your business plan, cash projections, your credit rating or a combination thereof.
2. Scale your business plan to match your available financing.
Your business plan may be to establish 60 locations across the nation, but if you don't have adequate funding to build the first location, then your vision is just a dream. Scaling a business plan to match available funding doesn’t minimize your grand big picture; it just adds a dose of reality to your plan.
Sometimes scaling a business means adding service delivery options that change and grow over time. There is no better example than the latest trends in restaurants and food service. In the past, a restaurateur had to plan and budget for a brick-and-mortar location. Today, a person hoping to open their dream restaurant may begin with a home-based catering business. Food trucks can also be a stepping stone for building a culinary business without spending every last dollar on the perfect restaurant location upfront.
3. Search for the perfect bank and banker.
Not all banks are created equal. In fact, no two banks or bankers are alike. When starting a business, a commercial loan is just one of the many needs you will have. A banking relationship should be one of your most trusted, most intimate relationships, similar to your lawyer and accountant. A great banker will do everything possible to keep a business customer from failing. As a banker's commercial customers grow, so does the bank. A trusted banker wants to see your financial plans and reports, give advice on financial matters and contribute to your strategic decision making.
4. Finance your own growth.
Not all business owners should finance their own growth. Many companies must have capital from others to launch, grow and sustain business. However, for the gun-shy small business owner, self-financing alleviates the anxiety that can accompany significant debt.
Financing your own growth takes tremendous discipline. Once you start turning a profit, the temptation grows with every dollar earned to spend it on everything except the business. Reinvesting profit in the business may be the only way to infuse the capital needed to grow the company without incurring the kind of debt that makes even the strongest-willed investor lose sleep.
5. Stay on top of your billing and accounts receivable.
Many businesses have failed or not grown as much as they could have thanks to uncollected receivables or debt. Surprisingly, a great many startups and small businesses struggle mightily because they don’t regularly bill their customers. Inconsistent billing practices result in inconsistent payment and growing debt.
The quickest way for an entrepreneur to eliminate financial risk is to be steadfast in billing and collecting receivables. Cash in hand is a tremendously satisfying feeling and worth the awkward collection calls. You deserve to get paid for your services or products. Period.
6. Consult trusted advisers in your decision-making process.
One of the best ways to minimize risk in life is to invite trusted people to participate in your decision process. Aside from your lawyer, banker and accountant, other business owners can be invaluable sources of insight that help you evaluate options and make decisions. By joining a mentoring organization or peer-to-peer advisory organization, you gain the experience and insight of a number of experts who’ve taken risks, too. Every business owner, to some extent, has been down this path of parallel risk evaluation and decision making.
7. Ask and answer, "What’s the worst thing that can happen?"
Always ask yourself, "What's the worst thing that can happen?" Your answer to this question establishes your tolerance for risk, but more importantly, the direct and subsequent impact risk has on your life.
Usually, the worst thing that can happen is a life-changing event like divorce, financial default or illness. The worst thing that can happen is usually a far stretch from the choice you’re considering.
For example, if you're thinking about getting a business loan, but think it’s risky, ask yourself: What’s the worst that can happen? If you have a great banker, accountant and lawyer, it is unlikely that any of them will give you advice doomed to fail. If you’ve self-funded your company successfully for two years, a business loan isn’t risky because you’re ready for next-stage growth. The risk of default is negligible. The business loan will be collateralized by receivables, which you bill and collect religiously.
Even the most risk averse can be successful small business owners. The key to fewer sleepless nights as an entrepreneur is to honestly measure your tolerance for risk versus reward.