How to Minimize Financial Risk When Starting Your Own Business

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how to minimize financial risk 

Reducing business risk is exceptionally important in first phases of company’s development. This is the time when companies are the most vulnerable, especially when it comes to finances. In this article, we will introduce you to three most basic ways how you can reduce your company’s business risks.

Buying surety bonds

Surety bonds represent three party agreements where surety company agrees to protect obligees’ interest and ensure that project is done in accordance with the contract. They do it for a fee charged from the contractor that also needs to vouch for project’s completion with company assets. There are different kinds of surety bonds and each kind drastically reduces risks associated with service-oriented small businesses. These are some popular types of surety bonds entrepreneurs can obtain:

  • License surety bonds– almost all service businesses need to obtain surety bonds, which protect the public, and are obligatory in most American states. There are different kinds of license surety bonds, depending on company’s niche, for example, there are: car dealership bonds, travel agent bonds, freight broker bonds etc.
  • Contractor bonds– are one of the most popular types of surety bonds that guarantee contractor projects. Different types of contractor bonds guarantees give guarantees for different phases of the project, like: bid bonds, performance bonds, supply bonds, maintenance bonds etc.
  • Commercial bonds– all other types of surety bonds are usually categorized as commercial bonds. Fidelity bonds are commercial bonds’ type that might interest new business owners, because they protect their company and customers from damages caused by employees’ fraudulent acts.

Surety bonds protect companies from obligees’ and customers’ capital claims, save company’s reputation in difficult times and enable entrepreneurs to continue running their business in a regular way, even when it is affected by various issues and problems.

Buying business insurance

Although most people consider insurance to be very tricky and sleazy field, there are types of business insurance your company can’t do without. These reduce business risk and are crucial when cart starts going downhill. There are seven different types of insurance every startup needs that cover various types of risks. These are:

  • General Liability insurance– covers all bodily injuries caused by the company and its personnel, which involves customers’ injuries, which can be costly and can lead small business into bankruptcy;
  • Worker’s Compensation insurance– covers employees’ injuries, while being on the job;
  • Errors and Omissions insurance– covers problems with company’s products that cause financial losses;
  • Cyber Liability insurance– covers the damage data breach incidents cause. These are exceptionally important for companies that do most of their work online;
  • Key Person insurance– it is a same as life or health insurance, just it pays premiums to companies instead of employees’ family. Insurance money should cover recruiting and training a new professional who should take the vacant job post;
  • Employment Practices Liability insurance– it protects companyies from employees’ claims for various types of mishaps from unfair firing and bodily harm to sexual harassment;
  • Directors and Officers insurance– covers lawsuits taken against company directors for actions taken on company’s behalf;

 

Know your business partners

Many entrepreneurs who recently incorporated their business are being rushed into shady deals, thinking they need to earn as much revenue as possible in the first phases of their company’s development. They often don’t question who they are doing business with, and this can result in major losses and piles of bad debt. Checking business partner’s background drastically reduces business risk.

There are several important checks that need to be done before signing an expensive deal with business associates. These are:

  1. Credit check– can be done in national credit bureaus like: Equifax, TransUnion or Experian. Credit reports should contain information about potential partner’s: tax linens, bankruptcy issues, poor credit issues etc.
  2. Google check– this is an easy and very effective check entrepreneurs can do by themselves. They just need to type the name of the company or some of its executives in Google Search, together with words like: ‘fraud’, ‘scam’, etc.
  3. Court check– you can search county court records to find whether your potential business partner has been involved in a lawsuit;
  4. Better Business Bureau check– this institution keeps records of all running businesses and awards them with appropriate grades that range from A to F.

Only entrepreneurs who run their business in an adult and responsible way are able to survive today’s dynamic and highly competitive market. This includes securing your company’s finances and avoiding possible bad debt at all costs. Techniques for reducing business risk have been around since the time when some of the first New World business were founded, and they will stay relevant long after all of us retire.

 

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