7 Common Types of Business Risks (and How to Mitigate Them)

As an entrepreneur, taking business risks is a must if you want to be successful. So, what type of entrepreneur are you?

Are you a risk taker or a slow and steady entrepreneur? Believe it or not, about 20 percent of small businesses fail during their first year.

Although some businesses close for reasons out of their control, others close due to mistakes they could easily prevent.

The fact is that every business has a certain amount of business risk. This is true no matter what industry you’re in.

But there are things you can do to mitigate that risk. You just need to familiarize yourself with the most common risk factors companies face. Here’s what you need to know.

#1]. Injuries to Customers or Their Property

Every business needs customers to be successful. But those customers present a unique type of business risk — liability. As an entrepreneur, you should know that there are different types of insurance every small business owner should own in order to prepare your business against any unexpected misfortunes.

For instance, if a customer gets injured on your property or their personal property gets damaged as a result of your services, your business could be liable for the damages. When this happens, you have to pay for the cost of their medical treatment, repairs, or replacement items.

The best way to protect your operation against liability is to invest in a comprehensive business liability insurance policy. With insurance, the insurance provider will help cover the cost of the damages.

This is true even if the customers’ injuries are your fault. When determining the cost of those policies, insurance companies look at the type of business you run. If the industry is inherently high-risk, you can expect to pay more for coverage.

#2]. Damage to Your Building, Inventory, and Possessions

If you have a headquarters, you have property to protect against damage. For most businesses, this includes the building, inventory, equipment, and furnishings inside the building itself.

Should those items get damaged, you’ll have to pay for repairs and replace any unusable items entirely. A general commercial property insurance policy will help protect against that damage.

If anything happens, all you have to do is file a claim. Once you pay your deductible, your insurance company will cover the cost of the damages up to your coverage limit.

#3]. Income Loss Due to Interrupted Operations

If your business got damaged by a fire or other disaster, you wouldn’t be able to run your operation until you repair the damages. Depending on the extent of the damage, this could take months. This means months of low to no income.

So, how would you pay your employees or continue paying the rent or mortgage? For most business owners, this is enough to deplete their savings and leave them wondering how they can reopen at all. Business interruption insurance helps eliminate this risk.

If you have to close down for extensive repairs, the insurance pays for your standard operating costs and helps you retain your employees and your building. It may not be enough to completely replace your regular profits, but it can help extend your savings and give you breathing room.

#4]. Damaged Business Reputation

Online reputation and reviews can significantly help or hurt your business. When they’re positive, they inspire confidence in prospective clients.

But when they’re negative, you’re left dealing with the consequences. If enough people express their dissatisfaction with your services or products, the reviews can drive prospective customers away.

Unfortunately, there’s no insurance policy to protect against a bad reputation — deserved or undeserved. For this, you need to work with an experienced marketing firm.

They’ll be able to help you address any negative reviews as they come in. The sooner you deal with those negative customer experiences, the better.  

#5]. Business Credit

Every business, no matter how large or small, needs good credit to stay afloat. Loans are part of the process and there’s no shame in borrowing money to help cover your expenses.

But if you fail to repay what you borrow, your credit score will suffer. This makes it hard to get new loans and can increase the interest rate you’ll pay on future financing.

The only way to protect against this particular business risk is to pay back what you owe. Continue to make the minimum monthly payments on all debts.

This includes your utility bills, supplier fees, and even your business insurance. If you’re late or miss a payment, your credit score will suffer.

#6]. Seasonal Slumps

Almost every company has seasonal slumps. It’s part of the cycle of the business. For example, air conditioning contractors struggle to find work during the winter and your company is no different.

Think about the times of the year when you struggle to bring in customers. These seasonal slumps are a major problem. You can’t afford to lose out on profits because it’s the off-season.

You need to find a way to reach your customers during those stagnant months. Look at the services your business offers.

Is there something you’re missing that could expand your relevance throughout the year? Is there a way to market your company so clients think about you even when it’s not seasonally relevant?

If so, start making changes. Sometimes, all it takes is a little creativity and you’ll be able to expand your services without increasing your overhead costs.

#7]. Overexpansion

When you’re successful, it’s tempting to expand. And expansion is key to growing your brand and company. But there’s a right and a wrong way to do it.

Overexpansion happens when you grow your company too quickly. This means you’re too large for your current client base.

At best, it puts a strain on your operating budget. But at worst, it can oust your profits and lead to layoffs. Take things slow if you’re considering expanding.

Look at your current net profits, and your expenses, and think about what expansion will accomplish. If you’re on the fence, put it off. There’s nothing wrong with waiting to expand until your customer base demands it.

Finally on Mitigating Business Risk

When it comes to mitigating your business risk, the best thing you can do is pay attention to your daily operation. If things are running smoothly and you have the right insurance policies in place, you’re in good shape.

But if you notice a few things that you can improve, make those improvements. For more helpful tips on improving your business without putting a strain on your finances, check out our recent posts.

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