An area that many business owners dismiss in their business plan is the risks involved in their business. By not including them in your business plan could mean that you do not believe there are risks or you are avoiding disclosing them intentionally.
It is not the best start to have with a potential funding partner. By not saying what the risks are, you make the job harder for a lender or investor.
Funders need to understand the risks of your business. Whether it is a lender or an investor, their concern will be trying to balance the risks of your business versus the likelihood of a reward. An imbalance happens when entrepreneurs talk about the opportunities inherent in their business.
All funders understand that every business has risks. There are risks that exist with your products, customers, suppliers, and your staff. It is important to understand the nature and size of risks that exist from a funder’s perspective.
Why Lenders Want to Understand Business Risks
They want to understand whether or not the key risks in your business are fundamental to the investment proposition that it would prevent them from funding you.
Some businesses are not at the right stage to get funding because it could create more problems. These kinds of businesses are better off dealing with key risk factors before they seek external funding.
Lenders and investors want to understand the risks in your business so that can structure a funding package that works best despite what the risk is. Many business owners are wasting this opportunity because they are not giving funders an opportunity to structure deals that are suitable for them.
Highlighting risks shows that you are aware of what is needed to help. An investor may decide to proceed with funding, but it will be released in stages. The benefit of highlighting your risks is to show that you understand the danger that the risk posses for your company and that you are aware it needs to be dealt with. If you do not acknowledge this is a problem in the first place, it will be more difficult to talk about.
Highlighting the risks in our business will allow the investor to get to the root of the problem and give them a better idea of how they can structure their investment in order to make it work for both parties. If they are not sure of the risks or cannot get explanations for the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.
The Right Way to Address Risks
The reason why business owners do not talk about business risks with potential funders is because they do not want to appear weak. However, there is a right way to address the risk of a business with funders without turning investors and lenders off.
The solution is to focus on how to mitigate the risks. You need to take steps in your business as direct reaction of the risks you have identified. This is very powerful for funders and in positioning you as someone that can handle their business.
Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this case, you could demonstrate to funders the steps you are going to put in place to help increase the margins in your market.
The process of highlighting risks and outlining key mitigating actions demonstrates honesty and leadership quality that you are willing to solve the problems in your business. Lenders and investors want to see both traits in a person and they will be more willing to invest.
The Impact on Your Credibility
Any investor backs the leadership team first and the business second. They realize that you and the management team will deliver value and grow the business.
The consequence of highlighting business risks in your business plan with mitigation is that it provides funders an insight into you as a business leader. It demonstrates that only do you have an understanding of their need to understand risk in your business appreciate that minimizing risk is part of your job.
The Bottom Line
Funders rely on you to deliver our promise to add value to your business for all the stakeholders involved. The weight of this promise becomes stronger if they can believe in the charter of the team which comes from how credible you are a business owner.