For many, the word "financing" brings up images of risking all of one's saving on a business venture, only to lose it all and end up in bankruptcy. While this can certainly happen, it is not the normal case. Every business carries some level of risk, whether market-related or product-related. The key to success is assessing the risk of your business venture and deciding, based on this analysis, whether or not it is worthwhile to pursue it.
For those of you who are shaking in their boots already, relax. Risk doesn't automatically mean you'll crash and burn! Rather, it is the most logical way to evaluate a business for its likelihood to succeed or fail. Breathing easier yet? Keep reading to calm your fragile financing nerves.
There's No Such Thing As "Risk-Free"
Many business owners shudder at the word "risk." They automatically think that because there is risk inherent in their business model that it will push away prospective investors. Suddenly, a little bit of risk becomes the worst thing in the world and it must be covered up at all costs. So, many entrepreneurs resort to skirting the issues that would bring up some level of risk in their business plans and instead focus on the best parts of the plan. This is where most business owners go terribly wrong.
Now, while it may seem best to play up the best parts of your business and appear very optimistic, it can also send up red flags to a investors as meaning either: A. You haven't done your research, or B. You're hiding something.
If you're aware of a risk in your business model and fail to mention it in your business plan, you may be doomed for failure. Leaving the investor in the dark can make way for a nasty surprise when the rose-colored glasses come off.
Besides, there is no such thing as a risk-free business. Every business prepares for some level of risk. Even if your business model is planned out to the smallest detail, there will still be risk. Some factors are just uncontrollable, but they can be predicated, analyzed and solutions can be thought of to deal with these risk factors.
Know the Risk Before the Investor.
This should go without saying, but you should have a good idea of the risks involved in your business venture before an investor ever sets their eyes on the proposal. During your research, you'll come across all sorts of facts and figures to evaluate the marketplace and your place in it. Along the way, risk should make itself apparent.
The most common types of risk involved with start-up and growing businesses include: Financial
Even after calculation after calculation, there is always the risk that your company will run out of money before it can get off the ground. Whether certain elements were not accounted for in your business plan, or a market shift caused a delay in revenues, finances always bring some level of risk to the business building game. Likewise, the mismanagement of money or relative lack of experience can cause a financial risk to become a reality.
Product
Even if your product is designed and ready to be manufactured, there is still a risk that it cannot be produced economically (IE, for less than the best price you can get for it). Whether the prototype does not abide by certain characteristics, or it will be too costly to produce a functional product, this type of risk is most relevant to technological industries. With technology changing everyday, it very well may be the case that your product no longer suits the market need once created, or it may not function as previously planned.
Market
Market analysis takes up a large portion of the time you will need to create a business plan, but even hours of research cannot account for everything. Risks that affect the market include the possibility that a particular market does not grow as expected. Many times, a company's capital is drained as they sit by waiting for consumers to take notice. In these cases, the company often goes under. Market risk can be predicted and prepared for, but all of the planning in the world cannot eliminate this risk.
Management
Having the right people on board is half of the battle when developing a strong business model. However, there is a risk involved with the individuals that make up your management team. If you have one member of the team that is highly specialized in an area of expertise that is vital to your company's success, you are proverbially putting all of your eggs in one basket. Sometimes decisions like these are unavoidable. But it must be known that relying on the presence of one team member for company success raises the overall risk factor significantly.
Smart Risk
As stated previously, some level of risk is present in all business models. In fact, risk is present in businesses that are thriving. However, their established nature lessens the likelihood of these risks from being realized. The key to making your start-up or expanding business a success is to account for these risks in logical, structured ways.
It is easy to find out what can go wrong with your business. It is much more difficult to figure out how to fix these problems should they arise. Being solutions-minded shows potential investors that you think proactively and are on top of your company's needs, and prepared to deal with setbacks.
In order to show that you are prepared to take action should one of your company's risk factors become a reality, you will need to outline your proposed solutions to these problems. Be realistic but creative in your solutions and you'll definitely capture an investor's eye. Investors expect there to be risk. What they want from you is an indication that you have accurately assessed the risks, have a plan in place for each risk, and are mentally prepared to tackle these potential risks head on. That will show you think ahead and are ready to deal with real problems as they arise in your business--a surefire attraction for investors.
Risk Management
At bottom, risk management is the process of thinking ahead. What many people don't realize is that risk never really goes away. While the risks to a start-up are quite a bit more perilous than risks to an established business, they never cease to exist completely.
Risk management, then, involves the process of continuously thinking ahead. In fact, it is broken down into three distinct categories:
Assessing Risks Regularly
Start-up companies may not have sufficient funding to start a full-fledged risk management department, but they can still evaluate risks on a regular basis. Everyone in the company can be involved in the process and be trained to deal with potential risks. For instance, should a virus somehow penetrate the company server, each employee should know who to call and how to react to the situation. While this is not exactly a risk that can be planned for, it can be anticipated. You don’t know when a virus will hit your server, but you can be fairly sure that, at some point, a virus will hit your server.
Sometimes, risks come to the surface with no warning whatsoever. But a good risk management department would have already taken into account the likelihood of such a surprise risk of occurring and made necessary allocations. For instance, if the price of a key component skyrockets one day with no warning due to some world event, a company with sound risk management practices would have a plan in place for adjusting operations accordingly – perhaps a stockpile of parts, perhaps a price increase coupled with a marketing campaign explaining the situation, or perhaps the replacement of the product with its next-generation version.
Prioritizing Risks
After potential risks are identified they then must be prioritized in order to ensure the appropriate risks are being addressed. Which risks seem most threatening to the wellbeing and livelihood of your company? Which risks are least likely to arise and can be addressed at a later date? Prioritizing allows the risk management department to address what is current and necessary while leaving the least threatening risks for another day's work. However, this does not mean that "low" priority risks should be ignored altogether; it just makes for a functioning system of risk management.
Creating Risk Solutions
Once a priority list has been created, then solutions can begin to be contemplated. What are the best ways to deal with each risk? If you have a high market risk, what are some ways to prevent your target market from dissipating? Or, if your highest risk is financial, how can you better manage your company's finances now to ensure adequate funding later?
Be Credit Smart
On a related but different note, the use of credit is also often a concern for finance-wary business owners. What if I go into debt? What if I lose all of my company's capital? Or, even worse, what if I lose my personal savings?
Stop worrying! As long as you use your credit wisely, you'll be fine. Just don't start charging everything to your credit card, from a brand new computer to filing cabinets. The key is to make timely credit purchases. Swiping the plastic during a month of profit loss is not so wise.
Also, get a credit card specifically for your business. Many people use their personal credit cards to fund business ventures, which is a major no-no. Going into personal debt will make it all the more difficult to obtain a loan or other financing later down the line.
If you must use your personal credit card to fund your business, only do so on a temporary basis and keep track of EVERYTHING. Do not let one penny go unaccounted for. After all, your credit score can dramatically affect your ability to obtain financing for our business and your personal life, so take care with the credit.
Still not breathing a sigh of relief? Well, perhaps the next chapter will boost your spirits. Our comprehensive business plan guide will show you how to secure financing for your new or growing business.