A business becomes high-risk if it operates in a high-risk industry (pertaining to health and safety), if there is a high risk of financial failure, or both. In many ways, the level of risk that a company has played a great role in its direction, decision, and operation, among other business aspects.
So why do these high-risk companies still operate despite all the risks involved? The answer is relatively simple: the majority of high-risk businesses often reap higher rewards. Like a game of poker, the higher the bet is, the higher the potential reward—but also the higher the risk.
To further understand what a high-risk business is and how it differs from lower-risk businesses, here are some examples of high-risk business types:
1. Bail bonds
A bail bondsman is an individual or agency that pledges money or property as bail to release the defendant from jail and ensure their appearance in court. The bail bondsman usually obtains collateral from the defendant as well as a down payment before they turn over the bail.
If the bail is set to $100,000, the bail bondsman will typically ask for a 10% down payment, which is $10,000 in this example. They will also require collateral, which can be in the form of property, cash, credit cards, vehicles, and other assets that are equal to the bail amount. If the defendant shows up in court, they receive their collateral back, and the bail bondsman gets to keep the 10% down payment as a fee. Otherwise, the bail bondsman gets to keep both the collateral and the down payment.
As you can see, the job of a bail bondsman is relatively easy, and the reward is great. However, the usual clients of a bail bondsman are not all scrupulous, which is what makes this type of business risky. Even if there is collateral, there is no guarantee that the bondsman will be able to make a profit or break even if the defendant does not show up in court.
2. Hospitality
Hotels, inns, bed-and-breakfasts, short-term rentals, and other types of hospitality establishments have seen the worst of economic decline during this pandemic. However, global pandemics are not the only risk that hospitality establishments face. There are always seasons when business is slow, which is why these establishments have stricter cash flow measures to keep the business afloat when there is not enough money coming in.
3. eCommerce
In 2020, eCommerce sales were at a whopping $4.28 trillion all around the globe. It is estimated that international sales in eCommerce will grow to $5.4 trillion in 2020, if not more. These figures imply the enormous size of the eCommerce industry today, and we can only expect it to grow larger as more and more players enter the market.
In turn, competition is going to get even tighter. The fact that you can buy almost everything online nowadays proves that establishing a business in a particular market will be more challenging than ever before. That said, many eCommerce business failures are bound to happen—if not a faster rate due to the high competition, especially in rapidly emerging markets.
Nevertheless, eCommerce ventures can potentially reap high rewards, but there are many factors that determine this. When done right, an eCommerce business can achieve impressive revenue—and with relatively low overhead, at that (compared to brick-and-mortar stores).
4. Online gambling
Online gambling businesses (e.g., online poker, online casinos, gambling apps, etc.) can be just as risky as traditional gambling, if not more. In fact, they are flagged as high-risk by creditors, which makes it difficult for these types of businesses to secure financing. There is a high risk of fraud, both by players and business owners themselves, but, of course, there is also a big potential of high reward.
5. Health food business
Food businesses are inherently risky because of the highly competitive market and the difficult nature of running them. However, the risk is often higher for health food businesses. For one, there is a matter of ensuring that the business does not make false health claims that go against the rules of the Food and Drug Administration. More than that, health food businesses attract a smaller audience than other types of food ventures, limiting potential.
These are just some of the high-risk, high-reward businesses that are popular in most recent years. If you want to venture into one or more of these businesses, utmost preparation is the key to avoid the common pitfalls and reap the biggest rewards.
