Running any kind of business is a risky affair. Whichever way you slice the small business failure statistics, you’ll reach the same conclusion.
However, some businesses are riskier than others. For example, businesses in industries with a high number of worker injuries and fatalities are considered high-risk by insurance companies.
As a savvy entrepreneur, you must assess the level of risk associated with running a business. This, though, doesn’t mean you shy away from starting a high-risk business. As long as you know how to manage the risks, the business can still beat the odds and thrive.
To help you successfully run a risky business, we’re sharing a couple of tips and strategies.
Let’s dig in!
1. Understand the Nature of Risks
Every business faces several risks, but those risks aren’t created equal. Some risks, if left unmitigated, can cause your business to collapse while others will only have a minimal impact.
This is why the first step to running a high-risk business is to develop a good understanding of all the major risks the enterprise faces. Some businesses have collapsed because the owners overlooked or had no awareness of a certain risk. Conduct a comprehensive risk assessment and unearth all the potentially deadly risks the business faces.
With this information, you’ll be in a far better position to develop the best risk mitigation or risk management strategies.
2. Choose the Right Legal Structure
When you’re an entrepreneur in a high-risk industry, the last thing you want is to incur personal liability. You want to protect your personal assets from seizure in the event that the business is unable to pay its debts and creditors sue to recover their losses.
One of the most important steps you can take to protect yourself from personal liability is to structure the business with liability protection in mind. If you have a sole proprietorship in a high-risk industry, you’re putting your house and other personal assets on the line.
In many cases, setting up a limited liability company is enough to safeguard your own assets. Your liability is only limited to your shareholding, which means you stand to lose just what you invested in the business. Corporations also offer similar protection.
There are cases where a more complex ownership structure might be needed. For example, you can set up an LLC holding company, which in turn owns an LLC operating company. This offers greater liability protection.
Before starting a business, it’s prudent to consult with a business development attorney. They’ll assess your risks and advise on a suitable legal structure.
3. Make the Most of High-Risk Merchant Accounts
Roughly 40 percent of consumers in the U.S. prefer to pay via credit card. As a business, if you’re not accepting credit card payments, you’re leaving a lot of money on the table.
Unfortunately, setting up credit card payments isn’t an easy task for businesses in industries credit card processors perceive to have a high number of chargebacks. Businesses in the adult, CBD, crypto, e-pharmacy, and forex industries typically face a harder time getting accepted by major credit card processors.
If you’ve already been turned down, that’s because you didn’t know where to look. There are processors that specialize in high-risk businesses like yours, Bankcard being one of the popular ones.
4. Purchase Adequate Insurance
The purpose of insurance is to make you whole in the event of financial loss. In business, if a customer sues you, you may have to compensate them if the suit is successful. But if the business has liability insurance, the insurer will settle the claim on your behalf.
Sounds straightforward, right?
Well, business insurance can be complicated, since there’s no one policy designed to adequately cover all your risks. There’s general liability insurance, sure, but it’s limited in its applications.
Depending on the nature of your business, you’ll need to purchase additional insurance coverage. For example, if you have employees, general liability insurance won’t suffice. You’ll need to purchase workers’ compensation insurance, which is a policy that’s tailored to workplace injury and fatality claims.
If your business manufactures and sells physical products, product liability insurance is a must-have. Other types of insurance you might need include business interruption, commercial property, motor vehicle, and professional liability insurance.
5. Approach High-Risk Financiers
When you need business funding, chances are high of being turned down by formal financiers, such as commercial banks and credit unions. Since high-risk businesses are more likely to fail, not many financiers are willing to risk their money.
Should you need external funding, though, know that you can get it. You just need to approach financiers, mostly private lenders, who’re well-known to invest in or finance high-risk ventures.
The biggest downside is high-risk financiers or investors are expensive. This means you might be forced to give up a huge stake for an equity investment or face high-interest rates on debt.
Steer a High-Risk Business to Big Success
The higher the risk, the higher the returns – so goes a popular catchphrase in the business world. The truth is risk is a double-edged sword: it can make you big money or it can slash you to pieces.
When you run a high-risk business, there’s the possibility that you could lose everything. But it’s also possible that the business can achieve wild success. What makes the difference is your ability to manage business risks.
Keep tabs on the money and business section for more insights.