Financial risks to consider when starting a business during an economic slump
The global pandemic has forced thousands of small businesses to close over the past year and the businesses that have survived have had to learn to adapt. However, whilst it’s been a difficult time for many, others have taken the opportunity to go from unemployed or furloughed to entrepreneurs, taking that small business idea, and turning it into a source of income.
Whilst there are many benefits to working for yourself such as having flexible working hours, and being able to work from wherever you are, it is also important to acknowledge the financial risks that can come with starting your own business. We have recently spoken about how to go about starting a small business, however in this article we explore the financial challenges you may encounter when starting a new business within an economic decline.
What are the risks of starting a small business?
What are the risks of starting a small business?
Business risks can apply to any situation, and can stop you from attaining your goals and objectives. Risks vary from internal risks, that your business can try to control the outcome of, such as strategy or financial risks, to external risks that you cannot control, such as an economic slump caused by a global pandemic. It's important to understand the effects the different types of risk can have on your business, and the steps you can put in place to overcome them if the challenge does come up. There are four key risks to consider when starting and owning a small business: there can be more depending on the type of business you plan to run, however the main four are:
- Financial risk
- Operational risk
- Compliance risk
- Strategic risk
Each of the above risks has an impact on how a well a business will succeed, and risk assessments should be carried out against each of them, as well as implementing a risk management strategy. Throughout this article we will be discussing the financial risk of starting a new business.
Financial risks to consider
Initial finance
Before you even start your business, you should carry out research to estimate costs, enering you have enough money to keep your business running until it can stand on its own two feet. Once you have done this, you will know how much you need, and whether you require additional funding. Traditional bank loans can be the most popular way to access funds amongst start-up businesses, however, it’s important to research and compare options to find the best loan for your business needs. Doing this allows you to understand the interest rates that you could be paying, and which terms would be best suited to your business plans and current financial situation, enabling you to estimate how much you can borrow and for how long.
As well as applying for a business loan through a traditional lender, such as a bank, many start-up businesses can take advantage of the opportunity to apply for a government-backed start-up loan. These loans are an unsecured personal loan, ranging from £500 to £25,000 and are available to those who have started a business within the last 24 months in the UK. As well as the loan, the scheme also offers free support and guidance for writing a business plan, as well as 12 months free mentoring to help new businesses owners to succeed.
When starting a business, it’s also be important to compare business bank accounts. Take into consideration the monthly fees, interest rates, arranged overdraft options and overdraft facilities so that you are getting the best bank account for your business needs.
Risk to current credit rating
If you have a good credit score you may get offered a higher amount of credit to start your business. However, you must pay your debts in full each month to ensure your credit score remains good. It could also be a good idea to monitor your credit report regularly to ensure that your score is maintained. When you take out credit, it is also important to take into consideration how much you can afford to pay back each month, as you will need to factor in your running costs, as well as costs such as wage bills.
Many start-ups may not qualify for a business loan due to not having sufficient financial history, so they might apply for a personal loan instead. When you apply for a business loan, if you are rejected it may show up on your credit file, which could then have a negative impact on your personal credit score.
Change of Customer Habit
Your customers habits changing can also pose a potential financial risk to your business. As we have seen over recent years, the way in which customers purchase products and services has changed, and it is important for businesses to change with them. Within your business plan you will have put together a forecast, but what happens if your customer base changes? Will you be able to adapt quickly and easily? It can be difficult to adapt on the spot, so it would be a good idea to note down some potential scenarios in which your customers’ buying habits could change and then include the proposed solutions. This could even be a case of marketing to them on a different platform - if you are prepared for these challenges it can make them a lot easier to overcome.
Another financial challenge start-up companies can come across in the early days is their pricing structure. Some businesses start their pricing lower than the competitors to help them gain custom, however some don’t increase their prices once they have those initial customers and end up not making a profit. When putting together your pricing matrix it is important to consider variables such as production costs, daily running costs as well as a marketing budget.
Carrying our market research via activities such as surveys, or a pricing exercise with your competitors can help you put together a suitable pricing structure that will ensure that you continue to make a profit, even past those crucial few months.
Conclusion
Starting your own business can be daunting and setting up a business during an economic decline even more so. However, with thorough research, a solid business plan, and the flexibility to adapt to new and different situations you can minimise potential risks, and maximise the success of your new business.