Avoiding Common Pitfalls: A Guide for Business Owners

Ask any business owner, and they’ll shoot you straight. Starting and running a business is hard. There is nothing easy about it. It takes a significant investment of resources – time, money, and good old fashioned sweat equity. At the end of the day, many new business owners invest so much of themselves in their business that they become vulnerable to making some very fundamental mistakes.

It’s critical for any business owner to take a moment to understand how just one costly mistake could take away everything they’ve worked tirelessly to build.

Mistake #1: Not having the proper insurance protection

Starting and building a business is capital intensive, and, for many small business owners, much of the capital comes from family resources. Financial capital – whether equity injected into the business or debt you must repay - is tied up in property, equipment, and other business assets. While most business owners recognize the need to protect their business assets in the event of a fire or natural disaster, most underestimate their personal insurance protection needs, leaving their families and business potentially financially vulnerable.

• Life insurance protection: Work with a trusted advisor who can help determine the appropriate amount of life insurance by evaluating the income generated by the business and the value of any family or investor resources tied up in the business. This ensures that your family and business partners have the necessary financial support in the event of your unexpected death.
• Disability insurance protection: Disabilities can leave you unable to work due to an injury or illness. Yet, most business owners don’t have adequate disability income protection. Remember to secure disability insurance that covers any business loan payments, protecting your business from financial strain if you are unable to work.
• Liability insurance protection: Liability claims arising from personal injuries, negligence, product or service liabilities, and property damage continue to increase. It’s important to work with an expert who can help you assess the specific risks your business faces and recommend appropriate liability insurance coverage to protect against claims of personal injuries, negligence, product or service liabilities, and property damage.
   

Mistake #2: Not having an asset protection strategy

Insurance can only go so far in protecting a business owner’s assets. Unless your business is structured as an LLC or a corporation (S or C), there is no distinction between your personal and business assets. Creditors and litigators can go after both. But even with the protection of an LLC or incorporation, personally guaranteeing business loans, which is generally a requirement of financial institutions, makes personal assets vulnerable to creditors in the event of a business loan default. Business owners with personal assets to protect should work with legal counsel to explore all legitimate strategies to protect them.

A trusted banker or financial advisor can offer financial solutions and products that help protect your business assets. For example, they can create strategies when acquiring debt financing that mitigate the risk to the lender, so that the personal guaranties of repayment might be minimized. They can also help you manage your business accounts separately from your personal accounts. Bankers can also discuss various risk management solutions, such as credit insurance, which can help protect your business from uncertainties.

Mistake #3: Trying to manage their personal finances on their own

Business owners are typically very astute, ambitious, and capable people. Ironically, many often do not prioritize the day-to-day management of their personal finances. It’s not for lack of ability. It’s more because they don’t have or take the time to do so. For many business owners, their business is their financial plan, so they give little attention to their personal financial situation. As a result, they tend to pay more in taxes than necessary, fall behind in accumulating retirement assets, and are much more likely to make the big mistakes of not having enough insurance or asset protection. And, as their business grows, more layers of complexity are added to their personal financial situation.

As a business owner, it's important to have a trusted advisor you can lean on as a valued partner. Bankers can help business owners on create a financial plan, build a retirement strategy, and set up trusts for their heirs if appropriate. They can also help integrate business exit strategies, so you maintain the integrity of your business, even after retirement.

The most successful business owners are highly proficient at allocating resources and time, and they know they can be more productive when they build a team of trusted advisors who can help them build and protect their investments. Managing personal finances becomes more complex over time as the business grows, so the time to outsource that function in collaboration with a trusted advisor is early on to allow for a solid and effective advisory relationship to build over time.

Building a relationship with a banker means having ongoing support and advice as financial situations evolve. The continuity of a business banking relationship can help business owners adapt to changes and keep their financial goals on track.