Financial Risks

The end of the road for any business is running out of cash. Some days, when you're an entrepreneur, it seems like all roads lead there.

For startups, the biggest financial risk stems from not having a Plan B in case investors and lenders say no (or don't say yes quickly enough). Many entrepreneurs fail because they make the mistake of betting everything on being able to secure outside financing.

It's true that many types of capital-intensive businesses do require significant startup funding. But if you're a rookie entrepreneur, the odds of finding an investor willing to take a huge risk on you are slim. It may be more prudent to start a business that requires a more modest amount of initial funding. You'll also want to have two separate business plans: one for growing the business if you happen to succeed at finding an investor, and one for bootstrapping the business if you have to go it alone.

If you do succeed at raising capital, the next trick is to figure out how to start generating enough revenues to cover your costs before you run out of money. If you thought raising capital was tough, you're in for a surprise.

Financial risks don't disappear once your business is up and running. Any number of things can adversely affect the cash flows of operating ventures: Customers can default on your invoices (credit risk). The cost of your raw materials could skyrocket (commodity price risk). A strengthening dollar can reduce the net profits from your international customers, or a weakening dollar can jack up the cost of your offshore manufacturing operations (exchange rate risk). A spike in interest rates could raise the cost of your working capital (interest rate risk). A plunge in the value of stocks or real estate you pledged as collateral could cause your bank to cut your credit lines (asset price risk).

Entrepreneurs quickly discover that it's impossible to raise money when you need it, and everybody wants to give you money when you don't need it. One way to mitigate financial and other risks is to take funding when it's available and keeping it in reserve for a rainy day.