Managing Business Financing Risk

“The Essence Of Business Finance Is Proper Management Of Risk”

If you’re a small business or medium sized business owner then you are both business person and investor.

The process of starting a business and growing it must have a considerable and continual focus on risk management for a number of reasons.

First, without eliminating, identifying, and mitigating risk, you always put yourself in a position to be shut down by events you no longer can control or influence.

Second, you’re ability to attract capital and lower cost forms of capital is highly dependent on your ability to show that you have historically been able to manage risk and that you have accurately identified and mitigated existing risks to a satisfactory level.

Third, you put your own hard earned equity in jeopardy which can set you back years and create a level of stress and disruption that most people would want to avoid at all costs.

I came across this article for managing risk in the Financial Post.   http://business.financialpost.com/2011/05/11/no-need-to-dread-investment-risk-just-manage-it/

And while its geared more to a pure investor, the points made apply to SME’s as well.

Its interesting that when I talk to entrepreneurs trying to raise capital, the attitude many times is that you have to take risks and that just comes with the territory.

Their focus is to aggressively market their opportunity, taking the position that the strong upside potential will more than make up for any and all risks they face as a new business or an existing business taking a leap into a new area of business opportunity.

Which is also why start ups and acquisitions have such a high failure rate and why they have such a hard time attracting capital.

Sources of business financing capital, either in the form of debt, equity, or a combination of the two, are certainly looking for opportunities to extend loans or make investments as that is how they make money.

But what they are also looking for is a business model and opportunity that has done a good job of identifying the risks that further capital investment will bring along with a plan to address and mitigate these risks in an acceptable fashion.

There is always going to be risk of loss for everyone involved.  But having an approach that demonstrates risk management has a much better chance of raising capital than one that does not.

Let me further add to this last point…

The less focused you are on risk and risk management, the harder it will be to locate and secure capital, the more likely the cost of financing will be higher, the more likely that the terms and conditions of business financing will be more difficult to meet and manage, and the collective result of the above is that the risk of failure has also increased.

During economic times when there is abundance of money that needs to be placed by money managers, the prospects for getting money for the aggressive business owner or entrepreneur could still be very strong.

But right now, we are not in such times, and the more sure path to money is by demonstrating your ability to manage capital and keep it.

And as the article linked to above states, “if it keep awake at night, it’s too risky”  should always be factored in before you accept any type of business financing commitment.

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About the Author Brent Finlay