The other day, I was talking to a small business owner about risk. Individually, I’m a risk averse sort of person. He was not. He had started up his business two years ago and he had grown quickly. The company is now up to around 20 employees with plans to expand to double that within the year. That sort of growth comes with a certain amount of risk.
I should start out with a quick note: business risk is bigger than just financial risk. Financial risk is something that almost all companies are going to experience. If you take out a loan from Local Bank, PLC they’re taking on financial risk because your business could fail and then you would default. That’s why most banks like to see some assets before they lend; they know they have something they can sell to cover their loss if you can’t pay.
Business risk is bigger than that sort of thing. It certainly encompasses financial risk but it also includes things like market and consumer risks. Let’s say you make Blackberry holders. By entering into that sort of business you take on the risk that RIM (the makers of Blackberry) might stop making phones. You also take on the risk that consumers will move to the DROID or iPhone.
Business risk covers legal risk as well. Depending on the sort of legal entity that your business becomes you may take on varying levels of personal risk. Unless you’re a lawyer, I would suggest getting real friendly with someone who is.