What types of risks does my small business face?

Starting a business can be hugely rewarding. There should be lots to look forward to – whether you're just getting an idea off the ground, or are a more established business enjoying steady growth.

But as the economy, technology and markets evolve, it won't always be plain sailing. Your business journey may include challenges and risks.

In fact, according to research by Vodafone, a tenth of small and medium-sized businesses flagged concerns about their viability as 2023 dawned.

Read on to explore the common risks entrepreneurs encounter as they make their way in the business world.

From pre-start brands gearing up to share their vision, to early-stage and growing businesses, we can help you prepare for the types of risks you're likely to come up against.

Pre-start businesses: The risks

The pre-start phase is all about intricate planning, futureproofing and establishing your brand. It can help you identify risks before a product or service officially goes live. Here are some of the potential threats:

Lack of customer demand

From caterers to software developers, entrepreneurs are always on the hunt for the next big innovation.

But however strong your idea, it'll ultimately succeed or fail by customer demand. Market research and real-world testing could help you gauge whether your plans are viable – and if they meet a genuine need.

Funding gaps

Production, marketing and supplier costs can quickly add up when you're first starting out. Realistic financial forecasts and cash flow modelling could help you to predict funding gaps in advance.

Think about the financial resources you'll need after going live. Will personal savings be enough to get you started, or do you need a business loan or investment from outside?

Defective products

Some businesses offer trials of their products during the pre-start phase. This may prove useful in ironing out any snags before you embark on a larger roll-out. But doing this comes with its own risks.

For example, you could be open to compensation claims if there are faults or safety risks with your test product and it harms prospective customers.

In this event, public and product liability insurance can offer financial protection against legal costs relating to product risk.

Early-stage companies: The risks

Early-stage companies are those that have just introduced a new product or service into the market. They're at the start of the journey, having only launched in the past 18 months.

For that reason, they're unlikely to be the finished article. However, with a 'minimum viable product', they can start to earn revenues and raise awareness.

In many ways, you'll still be testing the water at this stage, while learning how to make your operations as efficient as possible. For that reason, the potential risks include the following:

1. Reputational damage

No-one goes through life without making mistakes. It's a lesson that can be learnt the hard way, especially if your business revolves around advice or professional services.

A rushed launch might tarnish your reputation before you even get going. Protecting yourself against reputational risks is crucial.

The likes of solicitors, accountants and financial advisers could even end up in court if their clients suffer losses or damage.

In these cases, professional indemnity insurance (or professional liability insurance) can help to cover compensation pay-outs.

HR is another area where your reputation could take a hit without the right procedures. For example, our past research found that 75% of start-stage businesses are yet to set up a company pension scheme or payroll.

2. Economic and environmental disruption

Of course, some risks will always be out of your hands. An economic downturn could force customers to tighten their belts or delay payments.

According to the Federation of Small Businesses, more than half (52%) of smaller firms faced late payments during 2022.

It can be useful to think about the impact of extreme weather events and environmental damage too. How would you cope with a break-in, flooding or a fire, for example?

Business contents insurance and commercial property cover could support you in instances of economic or environmental risks.

3. Tough competition

Your competitors are sure to notice if you launch a ground-breaking product. By standing still, you're only allowing them to gain ground and start selling rival versions of their own.

For that reason, investing in continual innovation could help you to stay one step ahead. Applying for a patent can also protect a product's unique selling points.

Around two-thirds (65%) of businesses at the start stage have looked to put a marketing strategy in place too. This offers another potential solution to a competitive market.

Growing businesses: The risks

Business risks won't suddenly disappear after the first 18 months, as your firm becomes more established and enjoys growth.

Instead, an expanding company with growing profits can face an evolving set of challenges, including the following:

1. Finding the right talent

Building a talented team may not come naturally to all entrepreneurs. Rushing into recruitment decisions – or over-expanding – could leave you with long-term headaches.

Meanwhile, as your workforce grows, so can the danger of accidents. Employers' liability insurance can help to cover compensation costs if staff members are injured or fall ill at work. In fact, it's a legal requirement for most UK employers.

2. Dealing with the public

An expanding customer base should be good news for your balance sheet. On the flip side, it can create more opportunities for things to go awry.

Quality control might suffer if you take on too much work at the same time, fuelling public complaints and negative reviews.

What's more, accidents can easily happen, even with a tight focus on health and safety. They could involve a slip on the shop floor, or property damage during a construction project.

Whatever the cause, public liability insurance may shield you from full financial harm.

3. Leaps in technology

From apps to artificial intelligence, the digital revolution shows no sign of slowing down. Not every innovation will be relevant to your sector.

But staying up to date with emerging trends can prevent unwanted surprises and keep your business agile.

Building a resilient start-up

In a fast-paced world of economic and technological change, no business is immune from risk.

Different challenges await entrepreneurs as they move from the pre-start and early stages to a more established, growth-focused business model.

Insurance can play a valuable role during each phase of the start-up journey, tackling a range of financial threats.

Relevant resources

• What insurance do I need when running a business from home?

• I'm starting a business: What insurance do I need?

• Risk assessments: Your best business friend