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Business Finance Risk Management

Updated on January 18, 2016
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Stephen Bush is the founder and CEO of AEX Commercial Financing Group. Steve obtained his MBA from UCLA and is a U.S. Navy veteran.

Don't Roll the Dice
Don't Roll the Dice

Avoiding and Managing Small Business Financing Risks

Most small business owners have their hands full with a wide variety of important things to do. However, business finance risk management falls into the category of high priority actions that must be accomplished without delay. If not, everything else will be at risk.

The good news: this is an achievable and practical task for small businesses. The bad news: small business financing risk management is still overlooked far too often. A good starting point is to evaluate commercial real estate and business risks relative to the associated costs and benefits.

While you might need specialized help to deal with these specialized problems, a prudent starting point is to learn more — and the primary goal of this Hub is to help you do precisely that.

Risk Measurement
Risk Measurement

Both Words Are Important: "Risk" and "Management"

Some of the Reasons Small Business Owners Might Ignore Risk Management

It seems appropriate to start the discussion by asking the obvious question as well as providing some possible answers — why would a business owner or manager overlook business finance risk management?

  1. Lack of adequate time to do anything else
  2. Failure to realize why it is so important to undertake a task as difficult and time-consuming as risk analysis for small business loans
  3. Lack of in-depth understanding about commercial financing
  4. A banker or loan broker tells a commercial borrower not to worry about the details

If risk management is so important, why would any business owner not pay more attention to it?

— Stephen Bush
Business Finance Risk Management
Business Finance Risk Management

Why Is This a Problem?

Business financing risks are avoidable in most cases, but small business owners often overlook what needs to be done until it is too late. A list of four noteworthy reasons for skipping even a modest amount of business finance risk analysis is shown above.

Avoid Business Writing Risks

Risk Assessment
Risk Assessment

Risks Should Be Scrutinized

An effective approach to business finance risk management is not feasible without evaluating and understanding the underlying risks. This step must then be followed by actions to manage those risks. One of the most controversial discoveries during the recent financial and banking crisis was how regularly banks seemed to have lost sight of this basic premise.

A Poll - Agree or Disagree?

Please indicate if you agree or disagree with the following statement.

Banks should be legally permitted to invest in whatever they want without regard to the actual or potential risks.

See results

Now Is Not a Good Time to Cut Corners When Financial Risks Are Involved

With the current number of "Problem Banks" and "Zombie Banks" at historically high levels, it is an appropriate time for small business owners to be more thorough and prudent when they evaluate their practical commercial finance options.

One More Thing

  1. In case you just looked at this discussion casually, I want to reiterate a very important observation about small businesses managing financial risks. If there are two words that small business owners should remember after reading this lens, they are "risk" and "management." Risk is truly present everywhere you look, and this is especially true for anything involving the entire financial sector (banks are the most prominent component). The point is not to avoid risks altogether (because that is in fact impossible) but to ensure that the unavoidable risks are effectively managed.

Six Questions to Ask: What Is Risk Management?

Asking the Wrong Questions
Asking the Wrong Questions

Risk comes from not knowing what you’re doing.

— Warren Buffett
Always Have a Plan B
Always Have a Plan B
A Practical Guide to Risk Management
A Practical Guide to Risk Management

A business finance risk management book that has the word "practical" in the title AND successfully follows through in delivering on the title's promise is must-reading for anyone juggling business and finance problems and risks.

Thinking Outside of the Risks — and Outside of the Banks

When individuals and small businesses choose a bank, they probably think they are reducing their risks rather than increasing them. A risk-free environment is usually an unattainable goal, but managing and controlling risk factors should translate to less risk exposure rather than more of it. With banks, the net change for most small business owners has been an increasing exposure to problems and uncertainties.

The first of these obvious challenges began a year or so before the "official" banking crisis. It was probably more obvious to someone like me who works regularly with lenders of all types and sizes. Commercial borrowers began to have difficulty obtaining what should have been routine commercial loans.

The second wave of problems appeared with the actual financial crisis. Funding for most purposes dried up almost overnight. Something was obviously very wrong, but in reality it had been developing for several years. People like Sheila Bair (head of the FDIC) had been warning government officials that a serious situation was only going to get worse if nothing was done. Spoiler alert: Nothing was done and nobody went to jail.

The third wave of bank risk and problems occurred after the banking bailout when it became obvious that there were now "Zombie Banks" that were unable or unwilling to make normal small business loans. At the same time, the supposedly "good banks" began assuming excessive investment risks (again) similar to the financial derivatives that caused the "official crisis." Billions of dollars were lost. Congress investigates. Nobody goes to jail, and a new phrase was born ("Too Big to Jail").

Are you willing to admit that there is a risk pattern within banks that is excessive and out of control? Sheila Bair made a very astute observation about banks taking risks over and over again:

"How many times can you go into a wall at 90 miles per hour?"

The fourth and future waves will probably involve new risks and new problems for banks. You need to plan ahead and ask: "What could go wrong?"

What would Sheila Bair do? Her answer is shown below — we should all listen.

 

The banks should have been let go.

— Sheila Bair
Thanks for Visiting Business Finance Risk Management — All images provided under End User License Agreement to Stephen Bush
Thanks for Visiting Business Finance Risk Management — All images provided under End User License Agreement to Stephen Bush

© 2012 Stephen Bush

And now, your thoughts on the subject...

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    • profile image

      anonymous 5 years ago

      This lens is serious. And it is seriously excellent!

    • bjesparza profile image

      bjesparza 5 years ago

      Risk management is always important to look at. I wonder if some people don't even know what it is. I'm not really great on the subject, but have learned some about it in college.

    • MatijaB LM profile image

      MatijaB LM 4 years ago

      Gret lens and good advices for business.

    • profile image

      redleafloans 4 years ago

      Awesome lens! Keep it up...

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