What Small Business Owners Need to Know About Risk
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- On June 15, 2018
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As a small business owner, you already understand that your business is subject to internal risks (weaknesses) and external risks (threats). You may wish to conduct a SWOT analysis to evaluate the Strengths, Weaknesses, Opportunities and Threats (SWOT) — internal and external — facing your business.
In this article, we will focus on some of the risks involved when investing in another company and how to help mitigate some of these risks.
There are two primary types of business investments:
1. Stocks: You’re purchasing the right to own a portion of the company
2. Bonds: You are providing a loan to the company
If the company ends up closing and liquidates its assets, people who own bonds will be paid off first, followed by those who own stocks. The risk with either scenario is that the bond or stock owner will receive nothing. When deciding to invest in a business, consider if the company has a sound financial strategy and strong management. Whenever you choose to sell a stock or bond, you want to be sure that you earn back your money — and then some.
After understanding business risk, you may decide to invest in a large company that is not in as much danger of failure. However, keep in mind here that stock prices constantly fluctuate; they may be up one day and down another. Stock prices are often impacted by things the company has some control over, such as product quality, or no control over, such as the stock market and political climate affecting the market.
Economically speaking, inflation is defined as an increase in prices while the purchasing value of money decreases. When investing, this means that inflation could eradicate any return on your investment, particularly those who invest within a fixed interest rate.
Interest Rate Risk
Bonds are affected by the rise and fall of the interest rate. If you’re able to hang onto a bond until the time it matures, you will earn back the face value of the bond, plus any interest earned while you held it. If you must cash out a bond before it matures, there is the risk that the bond could actually be less valuable than it was when you bought it.
There is a risk that a market won’t exist for the investment products, which inhibits the investor’s ability to sell a bond or stock when they desire to do so. There is also a risk that your financial resources may not allow you to fully realize your investment plan. At National Business Helpers, we work with business owners every day on business financing and liquidity needs – ranging from Merchant Cash Advances, Small Business Financing Solutions, Bad Credit Funding & more.
How to Decide on an Investment
If you are not interested in assuming too much risk when investing, consider a savings account, insured money market account, or certificate of deposit — all of which are insured under the Federal Deposit Insurance Corporation (FDIC). The National Credit Union Administration (NCUA) and the Securities Investors Protection Corporation (SIPC) also ensure certain investments. All of these backings are preferred when the investor does not want to be too risky with their investment.