Harvard Business Review Essay: The No Asshole Rule
Normally none of our panelists use profanity in our podcast but when our panelist, Peggy Aulenback brought up an essay she had read in the Harvard Business Review entitled “The [...]
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"Risk and Finance is something that goes hand-in-hand. Period."
After working with over 10,000 companies from start-up to international firms, across industries, we’ve created our own definition of finance. Regardless of whatever type of finance you are seeking: whether through your personal funds, investors or financial institutions, it all comes down to this simple definition:
FINANCE BOILS DOWN TO THE ABILITY OF BEING REPAID.
In order to get financing, there needs to be a clear understanding of your business, your end goals, your risks (and how they are mitigated) and how the loan will be repaid. This is typically shown by a strong business plan with projections.
Let’s put it another way to make it a bit easier to understand:
“Hey Peggy, I’ve got this business idea and I’m telling you, this is the next big thing! Seriously! I just need $100,000 to move this forward and I promise that you will get paid back. Can you feel it? Are you with me? Just write me a cheque here and now. Let’s do this!”
Now, we are talking about YOUR money. What would you want to know? Again, the first thing that typically comes to mind is, “Are you going to really pay me back? And when?”
Why are you asking these questions? There’s risk involved. Period.
Requesting finance involves risk. Let’s get comfortable with the actual definition of Risk. Risk is defined, by Wikipedia, as “the possibility of losing something of value. Values (such as physical health, social status, emotional well-being, or financial wealth) can be gained or lost when taking risk resulting from a given action or inaction, foreseen or unforeseen (planned or not planned).”
Investors (friends, family, external investors) and lenders (financial institutions or groups) review business finance requests a little differently. However, the definition above covers everything.
When it comes to requesting finance, for any business, at any stage of growth, risk is inherent. The key to getting financing is first being aware of your risks and then, secondly, doing something about them:
"Remove the risks completely or build a strategy to mitigate the risks."
Six Key Risks
There are six key risks to be aware of, at any stage of the business, that directly relate to getting financing. They are as follows:
Character
- Character and integrity of the applicant
This can be both subjective and objective
Subjective: review the reputational risk of this person, business, industry, type of product
Objective: review personal and business credit history, ensure that the business is operating within compliance and regulatory requirements, strong strategic plan
Collateral
- What security will the company be able to put up should they not be able to pay the loan back?
- Building, equipment, accounts receivable, inventory?
Conditions
- Business: what is the purpose of the finance request? Is it for paying wages of the owners? Is it for new equipment that will increase efficiencies of the business, reduce costs and improve margins? Is it for working capital to help wait on receivables?
- Industry and Economy: trending of industry and the economy
- Operational risk: includes internal process risk (missing steps in a process) as well as external risk (environmental disaster)
Capacity
- What is the Cash flow of the business? Cash flow is what will pay back the loan.
- Financial risk cash flow, too much debt, business focused on just one client vs. diversifying or focused in one area vs. diversifying
Capital
- Equity already injected into the business. Equity inside the business shows that you already believe in the business yourself by injecting money and/or building profits year over year.
- The ability to further inject into the business. Your ability to add more money into the business at a later stage (personal funds, personal loans, friends or family or investors)
Startups
- For Start-up businesses, there are more risks as you haven’t yet ‘proved’ that the business can be viable. In this stage, one key risk is Performance Risk. This is simply that your service or your product offering will work.
- For example, if you are building a widget to enhance engine capacity, then how can you prove that your widget will ‘perform?’ Likewise, if you are running a service business, how do you ‘prove’ that your service will get the results you say it will?
Final Thoughts
We have outlined some of the key risks involved in getting financing. In your business plans, you must clearly ensure that you have the following: identify, assess, mitigate and monitor (ongoing) your risks.
If you want to build a business, you need to first understand the type of business you are building and why. Every business needs a strong foundation to stand on and grow. Once the foundation is established, you can then move to scalability and strategic growth. Without a solid foundation, as you grow, you will see cracks, and issues and potential tearing of the foundation and yes, some do even collapse. Spending the time to build the foundation is indeed key to mitigating risk, raising financing and running a successful, profitable business!
Here’s to your success!
To learn more, contact our Podcast Panelist:
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