Reducing financial risks of small business
As with any small business, going out on your own comes with a number of financial risks. Some of these can be offset with the right approach to lending, insurance and superannuation.
Why do people go into business for themselves? There are a number of reasons. They may want more control over their work and their future. It may be to generate more wealth or a passive income. For many, it’s the chance to indulge their passion and have the career of their dreams. Whatever the attraction, setting off on your own also carries its fair share of financial risk. It’s important to be aware of these risks – and how to reduce them – before you get started to help avoid any negative consequences.
It’s hard for small business owners to borrow money since they’re considered risky by traditional lending institutions. However, there are several options that can minimise risk, making themselves more attractive to lenders.
One option is to use their home as collateral when borrowing money for their business. Lenders like this because it ensures that the individual has a vested interest in their business. After all, no one wants to lose their house.
Insurance to cover risk
Various types of insurance are also used to cover risk. Life insurance is a common type of insurance used as collateral. If the owner of the business is unable to work or passes away, life insurance or other assets can be used to cover costs.
"When business owners don’t plan well for the future, this makes it hard to sell the business and extract the equity that has been built up in it."
Another type of insurance that covers risk is to choose key person insurance. Key person insurance protects the business in case something happens to the owner. This insurance is taken out on a person (usually the owner) whose contribution to the business is considered unique and irreplaceable.
Business overheads insurance is another type of insurance designed specifically to cover self-employed individuals in case they’re unable to work or perform their functions as the business owner.
Want more articles like this? Check out the financial management section.
Planning for the future
Retirement and succession are two other key considerations for small business owners. Superannuation means setting up a special fund that serves two important purposes. First, it offers a safe and tax-effective method for saving for retirement. Superannuation offers an alternative to employer-managed retirement plans that regular workers can enjoy. It also protects your assets in case of bankruptcy.
Australian small business owners often fail to plan their succession. When business owners don’t plan well for the future, this makes it hard to sell the business and extract the equity that has been built up in it. There is also a major tax liability when it comes time to sell, but this can be mitigated by the proper use of CGT (capital gains tax) concessions.
Professional support for small businesses
It sounds like a lot to think about and it’s a fact that the majority of self-employed Australians running their own business don’t give these considerations enough thought. To help sort through it all, consider hiring a financial specialist. This is the most reliable way to ensure your small business is protected from risk.
How do you handle the financial risks presented to your small business?