Risks of a Start Up Company

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Risks of a Start Up Company
Risks of a Start Up Company (Image: justgrimes': flickr.com)

Starting a business can be a rewarding endeavor. It can also be risky in situations where one or more people may not only put up a great deal of personal wealth but also make an emotional investment. While the benefits of being one's own boss inspires many people to start a business, the risks are sometimes not properly considered. Those who fail to do so may not only have a failed business, but also could put their personal assets at risk.

General Failure

The U.S. Department of Labor reports that 76 percent of new businesses are still in operation after six years. However, this does not mean they are profitable after six years, and even a 24 percent failure rate represents a significant risk.

Loss of Investment

Though start-up costs vary, USA Today has reported it takes an average of $50,000 in capital for a business to have a good chance of success. In other words, starting your own business will likely mean investing or borrowing a substantial sum of money. While spending at least $50,000 may increase chances of success, it also puts more at risk.

Loss of Other Assets

In some types of business models, you could lose more than simply what you invested in a company. In a sole proprietorship, if you get sued, your personal assets could also be at risk. This not only applies to lawsuits over liability issues, but also in the case of a lender trying to collect on a bad debt. These risks can be mitigated to a large extent by forming a limited liability corporation or getting insurance, but that takes additional time and resources.

Loss of Time

When you are an employee working for some else, the business model is clear. You go to work and get paid for your efforts. Pay, while not guaranteed, is a virtual certainty. In running your own business, spending 60 to 70 hours a week on the job is not unheard of and you are not guaranteed anything for that investment of time.

Credit Rating

In the past, the possibility of your business loan affecting your personal credit score was not much of a concern. However, "BusinessWeek" reported in 2009 that some lenders have begun to report business loans on an owner's personal credit rating. That means that even if you have stellar credit personally and pay all your personal bills on time, you may find your rating suffering if you are behind on business loans. The only way to guard against this risk is to make sure all bills are paid on time.

Security and Happiness

If, as an employee, you are unhappy at a company, you have the right to quit and seek other opportunities. The risk in owning a new business is that it may not be so easy to walk away if you are unhappy and want to get out. Financial obligations could force you to stay in the business or try to sell. However, even if you have your business appraised at a certain value, the actual offers you receive could be much lower than that figure for a number of reasons, including a biased appraiser and changes in the market.

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