Understanding Startup Risks and Resources Available to Reduce Them

Karla De Leon Q&A

Karla De Leon has spent her whole life around small businesses and understands the risks associated with them. We spoke with her to get some of her insight into what these risks are and where small business owners can go to get advice on how to best prepare for these risks. She is the Assistant Vice President – Economic & Business Development at Main Street Launch.

De Leon’s parents are small business owners, but her career in small business finance started when she was working as a business broker. Now, she helps small business owners prepare for and complete loan packages, and advises them on all aspects of their business, such as preparing financial projections, developing marketing plans and establishing an online presence.

Living With Risk

According to De Leon, aspiring entrepreneurs need to understand what being a business owner means beyond the financial risk that is associated with a new venture. She explains that starting a small business also puts an entrepreneur’s personal life and time at risk since a lot of time has to go into the business for it to be successful. “Going over the business’s financials to make sure the business is doing well, checking your email 24/7 to respond to clients and customers in a timely manner, checking bank statements, doing payroll, scheduling social media posts, and even cleaning the bathroom if no one else is around” are all things that an aspiring entrepreneur needs to be comfortable with doing. Having such a huge time commitment is especially risky given that entrepreneurs might not have a consistent income for a while, so they need to be aware of this risk that they are taking on. De Leon admits that it’s challenging, but from her experience, she thinks “it’s worth it.”

Do Your Research

For small businesses that can’t obtain a traditional loan, De Leon emphasizes the importance of doing lots of research and talking to a lot of people to learn about alternative financing options. She suggests talking to other business owners and looking for local community development financial institutions (CDFIs) to see if they can provide financing. She also recommends using the resource Opportunity Finance Network, which allows people to find a CDFI nearby that might be able to provide financing. She explains that getting in touch with CDFIs is helpful even if they can’t offer you a loan, since they can still put you on the right track and help you find your next best option.

Finding the Least Risky Loan

In terms of deciding whether a small business can afford to take on a specific loan, De Leon says that it is important to look at the overall cost of the financing options. To be able to determine the interest that one would be paying over the life of a loan, she suggests using an online calculator. The following step is to add in the fees. She explains that “sometimes a certain lender will have higher fees but a lower interest rate, so over the life of the loan you might be saving money by financing the fees and paying a lower interest rate.” Another important thing to ask about is if there is a prepayment penalty, so that in the case that the business is doing well and you want to pay off the loan faster, you know whether you can do so without paying a penalty. If there’s no prepayment penalty, then it is beneficial to pay the loan off faster and save on interest payments. The last thing to ask about is fees and whether you can finance them through the loan or if you have to pay them out of pocket.

Protecting Your Business

Finding the right financing option is just one of the actions small business owners can take to reduce risk. De Leon shared with us some other ways business owners can ensure that their business is protected against some of the risks that pose the largest threats. In the Bay Area, where Main Street Launch is based, “rising rents are a huge issue,” she explains. Therefore, she views a solid long-term lease as essential. Since there is no commercial rent control, landlords can charge whatever is written in the lease. Main Street Launch requires all borrowers to have written leases for the term of their loan to make sure they are protected. They also encourage borrowers, especially startups, to have their lease reviewed by organizations such as the Lawyer’s Committee for Civil Rights of the Bay Area, so that they can fully understand when their rent can be raised and when it cannot. Main Street Launch also requires businesses to have business property insurance to be protected in case of an emergency. She has seen businesses lose all of their inventory, and admits that “starting from scratch after you’ve been in business over 10 years isn’t just hard financially, but emotionally.”