In the lending and investing world, the people providing the funds are always looking at how risk can be removed, reduced, or off loaded.
Most business financing requests, at least on the surface, propose a viable strategy that requires capital when applying for a business loan or approaching an investor. What separates 90% of all applications (or more) is the failure of the applicant to identify risk and find a way to remove, minimize, or neutralize it from the business.
In the standard “field of dreams” application where you give me the money, everyone will come from all over to buy stuff from me, and nothing will go wrong along the way, only tends to work in the movies.
But in the real world, all deals have risks and the better you are at proactively identifying them and doing something to mitigate their occurrence or impact, the more likely you are of always being able to secure the capital you require.
The larger, more established the business, the less intensive risk management overall needs to be as financial strength and equity in the business will provide the means to deal with things that can and do go wrong in most cases.
But when you’re smaller, or in a start up or growth mode, there can be many more things that can work against you that individually or collectively can put you out of business.
So lets get into more concrete examples to further make the point.
Anything that is new(er) and less established has more risk. The most obvious first area of concern is Sales. The sales orders, defined letters of intent, contracts, etc., that you can procure or show are available to you when seeking money, the more attention you’re going to receive.
The same holds true for collecting the money once the sale is made. If terms are required, is there a solid credit granting policy in place, does the business have any experience in collecting money, can the accounts receivable be insured or financed directly?
On the supplier side, is there well defined purchasing agreement for price and quantity? Can the price be hedged in some fashion? Is there more than one source of supply lined up? What is the stability of the local suppliers and do you need to go further a field for better pricing and more certainty of supply?
These are all risks. Established businesses get established because they have been able to figure out how to deal with all the relevant risks to them as they developed their business over time. In many cases they were lucky that lurking risks did not impact them and as they went along, systems and processes and expertise were either developed or put into place to make sure key risk areas were kept under control.
For developing businesses who haven’t got everything figured out, the standard position is to push forward and figure things out as they go. If that truly is the approach, then you’re going to need to have a fantastic opportunity in tow to offset risk, or enough of your own money to make things go as its highly unlikely that people with money are going to part with any for business proposals that are just as likely to lose it as pay the money back.