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Business Finance Risk Management
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 here is to help you do precisely that.
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?
- Lack of adequate time to do anything else
- Failure to realize why it is so important to undertake a task as difficult and time-consuming as risk analysis for small business loans
- Lack of in-depth understanding about commercial financing
- A banker or loan broker tells a commercial borrower not to worry about the details
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. Of course, when the same problems keep recurring, a problem can become even bigger. Nine common examples of recurring small business problems are shown in the following table.
Lack of negotiating skills
Ineffective business finance communications
Evaluating prospective or current lenders
Obtaining small business financing
Inadequate business development
Lack of effective contingency planning
Communication with other businesses
Commercial lending negotiations
Need to reduce operating expenses
If risk management is so important, why would any business owner not pay more attention to it?— Stephen Bush
Avoid Business Writing Risks
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.
The truly dangerous thing is asking the wrong questions.— Peter Drucker
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.
The oldest, shortest words — ‘yes’ and ‘no’ — are those which require the most thought.— Pythagoras
Risk Management: A Critical Step Toward Improving the Bottom Line
One More Thing
- 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.
Now Is Not a Good Time to Cut Corners When Financial Risks Are Involved
With the number of "Problem Banks" and "Zombie Banks" recently 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.
Understanding Risks and Management of Zombie Problems
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
Six Questions to Ask: What Is Risk Management?
Risk comes from not knowing what you’re doing.— Warren Buffett
© 2012 Stephen Bush