Investors Knowledge Base

Risks Associated with Small Businesses

Lack of Professional Management: Most small companies are managed by their Founders. Very often the Founder of a company is very strong in one area – for example, she might be an extremely effective salesperson or a terrific baker – but lacks experience or skills in other critical areas. It might be a long time before (1) a Startup can afford to hire professional management, and (2) the Founder recognizes the need for professional management. In the meantime, the company and its Investors could suffer.

Lack of Access to Capital: Small companies have very limited access to capital, a situation that Title III funding portals hope to improve but cannot fix entirely. Frequently these companies cannot qualify for bank loans, leaving the company to live off the credit card debt incurred by the Founder. Capital is the oxygen of any business, and without it a business will eventually suffocate and fail.

Limited Products and Services: Most small businesses sell only one or two products or services, making them vulnerable to changes in technology and/or customer preferences.

Lack of Accounting Controls: Larger companies typically have in place strict accounting controls to prevent theft and embezzlement. Smaller companies typically lack these controls, exposing themselves to additional risk.

Lack of Technology: Many small businesses cannot afford the technology that a larger business would use to create efficiencies and cost savings.

Cash Flow Shortfalls: Many small businesses experience frequent shortfalls in cash flow. If a business doesn’t have enough money to meet payroll, it might not make payments on obligations to its Investors, either.

Competition: A small business is likely to be vulnerable to competition, whether in the form of another small business or a national chain.