Four reasons why small businesses don’t grow

Running a small business requires superior problem solving and the ability to take a bigger picture. In addition to ensuring your business is profitable on a regular basis, you also need to be concerned about your own long-term financial health. That includes having a strategy to build wealth so that you can enjoy a comfortable retirement once it is time to hand over the kidneys of your business to someone else. As an entrepreneur, there are certain obstacles you need to be prepared for that can hamper your ability to create wealth. (For a detailed summary, see? Researcher’s Tutorial How to Start a Small Business.) Here are four major challenges small business owners face.

1. Too much commercial debt

Getting a small business off the ground generally requires a certain amount of cash. Getting a term loan from a bank or a loan from the Small Business Administration (SBA) may be the answer, if you don’t have significant savings to take advantage of. With a 7 SBA loan, for example, it is possible to borrow up to $ 5 million to start a new business.

Even if you don’t need a loan to get started, that doesn’t mean your business will or should remain debt free. For example, you may decide to open a business credit card to earn rewards for daily expenses or take a cash advance from a merchant to help cover your cash flow during slower periods. Or you can borrow to expand, especially if the business is doing well. While credit cards, advances, and loans can be invaluable in keeping your business running, their convenience comes at a cost.

If a substantial portion of your business income goes to paying off your debts, that leaves less income to devote to growth. It also leaves you, as the business owner, less money to funnel into a single 401 (k), SEP IRA, or similar qualified retirement plan to secure your own future. While the interest on a small business loan, the payments themselves are not. By paying off your business debts, you can redirect the funds toward your retirement or into a taxable brokerage account.

2. An inefficient fiscal strategy

As a small business owner, filing and paying taxes can be one of the most unpleasant tasks on your to-do list, but it’s a must. If you are not taking advantage of all the tax advantages available, your wealth without even realizing it. Are there a number of tax credit deductions you can claim on your personal or business tax return? An expense should be considered both ordinary and necessary. This means that the expense should be something that is commonly associated with the type of business you own and that is directly related to your operation.

When you don’t take the time to maximize all possible tax benefits, the result is too high a tax payment. Hiring an accountant to manage your return may increase business expenses slightly, but it can also help minimize your tax liability. In terms of wealth creation, the long-term benefit can easily outweigh the cost.

3. Lack of diversification

Owning a business requires a certain amount of juggling, and you may simply not have the time to pay as much attention to your investments as you would like. The size of your assets affects your overall financial condition, including how banks view you, especially if you are a sole proprietorship. Investing in mutual funds or exchange-traded funds takes the hassle out of trying to put together an entire portfolio, but it can be problematic if the funds you’re buying have the same underlying values.

Business owners can also run into trouble if they don’t rebalance regularly. This is vital to ensure that you maintain the correct asset allocation, based on your investment objectives and risk tolerance. If you don’t rebalance regularly, you could end up with a portfolio that is too aggressive or too conservative. At one end of the scale, you risk losing money by betting too much on stocks. On the opposite side of the spectrum, you risk limiting your earning potential if you play it safe with a large number of bonuses. Either way, you are putting your future returns at risk by not paying attention to the level of diversification in your portfolio.

4. External risks

In addition to managing market risk, you must also be careful to insulate yourself and your business from threats that may arise in other areas. For example, what would happen to your business if you became ill and could no longer monitor its operation? How would your business and personal assets be protected if your business became the target of a lawsuit? What would you do if your business was damaged by a hurricane or other natural disaster?

These are the types of questions that small business owners should consider, because while such scenarios may seem unlikely, they can have a substantial impact on how wealth increases. Choosing the right business structure is an important step in minimizing liability, but you should also be proactive in reviewing your business and personal insurance coverage to make sure you are protected against all possibilities.