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A business risk is a circumstance or factor that may have a negative impact on the operation or profitability of a given company. Sometimes referred to as company risk, it can be the result of internal conditions or some external factors that may be evident in the wider business community.
When it comes to outside factors that can create an element of risk, one of the most predominant is that of a change in demand for the goods and services produced by the company. If the change is a positive one, and the demand for the offerings of the company increase, the amount of risk is decreased a great deal. When consumer demand for the offerings decreases, however, either due to loss of business to competitors or a change in general economic conditions, the amount of risk involved to investors will increase significantly. When a company’s risk factor is considered to be increased due to outside factors that are beyond the control of the company to correct, chances of attracting new investors is severely limited.
Internal factors may also result in the development of significant risk for the investor. Often, these are factors that can be identified and corrected. If flagging sales can be attributed to an ineffectual marketing effort or a sales force that is not performing up to expectations, making changes in the marketing approach or restructuring the sales effort will often result in minimizing the perception of risk on the part of potential investors. The same is true if a company’s manufacturing facilities are not operating at optimum efficiency. Revamping the operational structure of the plants and facilities will decrease the element of business risk and result in higher profits at the same level of production and sales, which will in turn make the company more attractive to potential investors.
In general, any investor will consider the relationship of a company’s securities and the business risk associated with the company before choosing to invest in the future of the corporation. While there is an element of risk associated with any corporate operation, proper management will result in creating a balance between assets and securities that will be attractive to individuals and entities that consider investing funds into the operation.
Sunny27- I agree with you. Banks are more receptive to loaning when their business risk is lowered. This is why many new business owners take out home equity lines against their homes.
The bank feels that these types of loans lower their business risk because know if the prospective business owner defaults on his or her loan, the bank can place a lien on the property.
So in the bank’s eyes the business owner has a higher stake in the game and will less likely default.
Great article, I just want to say that banks consider potential business risks when offering loans to prospective business owners.
The riskiest form of business is the restaurant business. These businesses tend to need high capitalization and have a failure rate of 95%. However, restaurant franchises tend to be more stable because of the proven business model.
Banks are more willing to provide loans for these forms of businesses rather than businesses that are unproven in the marketplace.