Starting a business requires consideration of multiple factors. Often, when starting a business, we are clear with the industry and product and also research a lot about competitors and substitutes available in the market. But often, we end up neglecting the financial risk and end up learning about financial risk the hard way. Wouldn’t it be better if we are already aware of the financial risks that businesses pose and proactively plan to mitigate them?
Let’s understand the financial risks that businesses pose.
Major financial risks for businesses
When starting up a business, we should be wary of the following financial risks:
Credit Risk
One of the most common ones and quite recurring. Businesses often fall prey to credit risk whereby their debtor becomes incapable to discharge its dues. Money gets stuck, and it often takes a long to recover the dues from such debtors. Customers defaulting on payment has a very adverse impact on the business, especially when the customer is a biggie. Therefore, it is important always to keep credit risk into consideration while starting a new business.
Market Risk
Changing the marketplace often poses a significant risk for businesses. For instance, with the advent of online shopping, traditional retail businesses witnessed a huge blow. Customer needs and preferences change, technology evolves, and therefore, it is important for businesses to adapt to the changes and stay relevant. The businesses that shifted online with the advent of technology survived and thrived while others struggled. If we fail to adapt to the changing circumstances, then it could be a huge financial blow to our business.
Liquidity Risk
Businesses may face a liquidity crisis. One of the prominent reasons is the delay in receiving payment creating a working capital gap. Another significant reason could be a huge investment, thereby creating a temporary liquidity crisis. What’s important is to subside this liquidity crisis as soon as possible otherwise, we can default in payments to our creditors and other stakeholders and face a loss of goodwill. Businesses often resort to working capital loans in order to mitigate liquidity risk. A working capital loan streamlines cash flow management and better liquidity among businesses.
Operational Risk
Operational risks involve the risk arising due to the daily operations of the company. This could create challenging situations and create financial pressure. Operational risk normally includes fraud risk, lawsuits, business model risk, personnel problems etc. Therefore, it is important to keep operational risks into consideration, especially when making any major decision.
How financial risks can be mitigated?
It is important to mitigate the financial risk for a business to survive and thrive. Following are the best practices we can adopt to mitigate financial risk:
- Understand the Risk: What is the major financial risk that our business faces? We should study our industry to know the major financial risks that could possibly arise for our business.
- Close the Working Capital Gap: Most businesses prefer going for working capital loans to mitigate liquidity risk. This ensures timely payment to creditors despite a longer credit period for debtors and lowers stock turnover.
- Leverage Financial Technology: It is important to leverage financial technology in our business. Put in place efficient payment gateways, use financial products like insurance to reduce operational risks and outside liabilities, take advantage of software that enhances our visibility into our business and consults financial experts.
In a Nutshell
Financial risks, if not mitigated, could be a reason for the closure of our business. However, if we take active measures and plan proactively, then we can mitigate these risks to the maximum. Fintechs are providing financial services that are helping businesses grow and prosper like never before.
Niyogin is one of the leading Fintechs that is revolutionizing access to digital credit, especially for MSMEs. You can avail yourself of working capital loans or any other financing facility to mitigate the financial risk. Further, the Wealth Tech solution ensures a proper financial plan for businesses. Have you partnered with Niyogin?