The Financial Perils of the Small Business

It’s hard out there for small businesses.

Nearly 1 in 5 businesses fail within the first year in the United States. After five years, 49.7% have failed. With millions of businesses in existence, that’s an awful lot of potential financial risk and personal hardship that can arise from a closing business. For small businesses, the peril is obviously even greater: with less funds and capital to work with, and an often-tighter circle of competition, small businesses can be directly impacted and shuttered with even one or two small missteps.

The heartbreak for a small business can be very real when it doesn’t work out. Many small businesses are built with the heart, soul, and vision of a few people or even a sole individual pursuing a dream to make their own way in the world. We feel for them because their story is ours, and their desire is to use their gifts and their skills to pay for the things they want, like a home, a family, children.

As a result, small businesses need to be smarter and savvier with their money than other companies. Their bottom line and their margins can be the difference between life and death for the whole enterprise. Many people who start small businesses often don’t realize what is all required to make it work, and how hard it can be to forge the business. Many also lack a solid financial foundation on which to base their vision.

Topics can range from budgeting to financing and loans, to the way a small business pays its employees and its taxes. Having good credit and a solid billing strategy are also vital and can be tactically handed in any number of ways. While many people don’t understand these financial terms and concepts immediately, they are very learnable and become second nature the longer the business is up and running.

For those looking to start or who have already started their own small business, there are some tips, tricks, and strategies that can help ensure the business survives.

Managing Your Small Business Funds

First and foremost, if you’re just starting a small business, you might well need to pursue a loan. Many entrepreneurs and small business owners make the mistake of trying to finance the entirety on credit, either personal or borrowed. While it’s possible to make this work, it’s also incredibly risky and carries with it some significant drawbacks. You’re on the hook for everything you purchase, and you can destroy your credit score and lose your business by doing this without a parachute.

If looking for a loan for your small business, there are a couple common types including:

  • Business lines of credit
  • SBA (Small Business Administration)
  • Short term loan
  • Business term loan

There are others, but these are some of the most common and have varying rates and repayment terms. If you have a lawyer or a financial advisor for your business (recommended), you’ll want to look through the terms of service closely and be aware of any possible drawbacks and considerations. Business loans can seem like a lot to handle, but they also help you finance the business, pay for billing and payroll, and pay yourself, too—all essential.

Keep your business afloat and thriving by investing in growth and your team. Turnover from employees can cost businesses a lot of money; by taking care of your employees, treating them right, and keeping their paychecks fair and on time, you build trust and keep your workers happy. Worker happiness has been shown to increase and help productivity. When you invest in your people, you invest in the personal and business growth of your dream. It’s a long-term strategy to keep your business viable and thriving.

Similarly, maintain good business credit by paying off bills on time and avoiding things like overdrafts and insufficient funds. Don’t bounce checks or payments to vendors, invest in smart but limited strategies like marketing and spreading word-of-mouth to grow the business, and make sure to keep a detailed receipt and record of all your financial expenditures and transactions related to the business.

Budgeting and financial administration is going to be the most essential thing you do for your business. It’s far too common for small businesses, flushed with loan cash, to overspend on inessentials in the hopes it’ll all pay off quickly and go into profit soon. Most businesses don’t even go into profit for 3-5 years, if they’re lucky; you must be in a position to not have solid, or really any, profit for that duration. This can require strict, careful budgeting and a specific payment system that rewards you and your vendors and affiliates.

Financial accounting programs like QuickBooks and Mint are widely available. Though they have a varying learning curve and may not work for every business or accounting style, they have broad use and are very adaptable. If you’re not able to learn them or don’t have the time, it might be a good idea to invest in a financial advisor, accountant, accounting agency, or a personal financial consultant who can help you keep track of these expenses and breakdown your budget in a more useful way.

Taking care to avoid financial fraud is also a crucial strategy to keep the business alive and functioning. Many small businesses close as the result of a hack or fraud, or another breach—avoid that by taking cyber security and personal security seriously. In 2020, Americans lost $56 billion to identity fraud. It isn’t hard for a business to go under from a simple mistake in a world of increasing cyber threats.

A big concern for small and medium businesses can be taxes and paying them on time and in full. While taxes are a complicated, big subject with lots of nuances, it’s possible to change your payment schedule to be more beneficial or easier to manage. You can also take advantage of an accountant or financial advisor to see if you qualify for write-offs and other potential loopholes that will help you.

While financial management for small businesses can seem like a lot to manage—and it is—it’s also very doable and can prove the difference between failure and success for any business of any size. Smart, simple tricks and manageable strategies are available to all who need them.