While there is no doubt that being a business owner can be highly rewarding, it can also be a high risk for one’s finances. Unlike in a regular job, the decisions you make moving forward will directly affect the business’s assets and your ones. So to help you adequately prepare for business ownership, read on to know the common financial risks you could be facing as a business owner—and how to mitigate them.
What you’re in for:
Reallocating your savings to business capital
When you don’t have anyone to invest in your idea, you might have to bootstrap, which means using your own money to finance your business. Though bootstrapping does come with certain advantages, like sole ownership of the company, it might also require you to dip into your savings accounts to invest in the business. All businesses present financial risk, even ones that are born out of good ideas. As the founder and owner, you would be the one to take on that risk.
Acquiring debt and risking personal credit
Many entrepreneurs often have to apply for loans or open lines of credit. There is nothing wrong with that, and it is a common practice among business owners. However, the risk escalates when the venture isn’t financially succeeding, and the bills pile up.
Who is responsible for business debt ultimately depends on your agreement with the lender and the business structure. Suppose you are operating as a sole proprietorship or a partnership. In that case, you (and your partners) and the business are the same. This idea means you have to pay off loans the business cannot, which appears on your credit history. But if you set up your business as a limited liability company (LLC) or a corporation, personal liability decreases. However, the company might have to liquidate its assets to pay off outstanding debt.
No guarantee of a steady income
Starting a business can also threaten your financial stability. Business ownership is a full-time job, and having a day job might stand in the way of your side venture’s success. But leaving a stable job means not having a steady stream of income. There is no guarantee as to when the business will be able to pay you a regular salary.
What You Can Do:
Evaluate your business structure
One of the critical decisions to make early on—and one that will influence your financial risk later—is the business structure. As mentioned, you have a choice between setting up a sole proprietorship, partnership, or LLC. (Corporations aren’t usually a choice for small businesses.) It is highly recommended that you opt for the latter because the main benefit of an LLC is limited personal liability. This structure protects your assets if your business is unable to pay its debts, lawsuit settlements, and other liabilities. LLCs come with added costs to set up and maintain, but those are preferable to the damage your assets might sustain should things go awry.
Separate the business from the personal
To further draw a line between the personal from the business, open up a business bank account. This account will make things easier for financial operations, such as bookkeeping, and protect your finances. Furthermore, a business bank account looks more professional, which can contribute to your business’s reputation.
Pad your financial safety net
Before launching your business, consider whether you’re in a position to quit your day job so that you have something to fall back on in case the company doesn’t succeed. And if this is something that you genuinely believe in, start building your savings fund now. That way, when the time comes that you have to commit to being an entrepreneur fully, the loss of a stable salary doesn’t deal too much damage to your finances.