Businesses face financial risk when doing everyday tasks. These risks are unavoidable, and sometimes, they’re necessary to get a positive return. Instead of enduring these challenges and facing the setbacks later, your company can minimize and manage financial risks to reduce the harm to your business. Financial risk management with alternative financing can help you identify possible risks and develop a strategic way to maintain your profitability.

Understanding Financial Risk

Financial risk is a situation that threatens your financial stability or could lead to monetary losses for your business. Your business can have less cash flow and be unable to meet your financial needs. Examples of financial risks include:

  • Strained cash flow
  • Loss of capital
  • Reduced profitability
  • Business closure

A lot of factors can cause financial risks in your business, including:

  • Inability to pay off your debt
  • Poor business decisions
  • A small customer pool
  • Changes in the economy
  • Few income sources
  • New competitors
  • Poor budget management
  • Changes in the market interest rate
  • Reduced revenues
  • Changing consumer behaviors and trends

Risks aren’t all negative; they often correlate with rewards, where greater risks can yield larger payoffs. Some financial risks can help you maximize your business opportunities and lead to positive outcomes. However, if a significant risk fails, your company faces vulnerability. It’s essential to safeguard your company, employees, and customers from financial risk exposure.

Types of Financial Risk

Your company may face several types of financial risk, depending on your industry, size and operational factors. The most common financial risks are:

  • Credit risk: Credit risk happens if money is borrowed and can’t be paid back, like if your customer fails to pay their bill. This risk leads to cash flow disruptions and even revenue losses due to unrecovered expenses for provided products and services. If your business only has a few customers, your credit risk increases. You must balance the risk of extending credit to your customers with the risk of them defaulting on their payments.
  • Liquidity risk: Liquidity is a company’s ability to pay for its financial needs using short-term assets and investments on hand. If you’re facing liquidity risk, your company can’t meet your financial obligations because you don’t have enough cash. Credit risk can lead to liquidity risk — if your customers can’t pay you (credit risk), your company may be unable to pay for rent, utilities, loans and other expenses (liquidity risk). Poor timing or having mostly long-term assets are also liquidity risks.
  • Operational risk: Operational risks are threats from internal factors during everyday business activities. These business risks are the result of internal breakdowns, like system failures, poor decision-making, fraud and human error. It focuses on how things are done in the business and what it prioritizes, not what is sold. Operational risks summarize human error, so industries with minimal human interaction will have lower operational risk and vice versa.
  • Market risk: Market risks are external risks caused by changes, fluctuations and events in your market outside of your control. Examples of market risks include interest rate changes, inflation, changing customer preferences, technology advancements and geopolitical events. They can cause change in your industry, and your business will need to adapt to keep up. Market risks can alter the value of your products, services and investments, impact your cash flow and risk your company’s profitability.

Four Strategies for Minimizing Financial Risk

Reducing your financial risk puts your company in a prime position to control the financial impact on your business. Here are four strategies to implement to mitigate financial risks:

1. Focus on Accounts Receivable Aging

When a debt goes past due, your accounts receivable (AR) — the money your customers owe you for the products and services you provided — starts aging. As your AR balances continue to age, the chance of your customer paying their bill decreases. Uncollected AR causes your business to lose revenue, profits and cash flow.

Keeping a low AR prevents this financial risk. Your company can use an AR aging report to stay on top of your balances and track payment statuses. Tracking AR also helps you identify customers with the highest credit risk so you can adjust your sales terms or terminate your relationship with them to protect your company’s finances.

2. Develop Effective Cash Flow Management

Running out of cash on hand can be detrimental to your business. If you’re consistently low on cash, it could eventually lead to your company closing for good.

Cash flow management keeps your cash flow in its best condition. You can understand how you spend your money and ensure your company and bottom line are stable and secure in the future. This approach reduces financial risks through planning and prevention by forecasting cash flow, monitoring AR balances, managing debt payments and more.

3. Have an Alternate Source of Income

Companies can become overly reliant on a single customer or segment of the market. This dependence makes your business vulnerable — if the market turns or is disrupted, it will greatly impact your finances. Having alternate sources of income can help you mitigate this financial risk.

Alternate income sources are ways your business can keep money coming in if your main source of income slows down. In manufacturing, you can retool your machinery to make a new product. This new product can open your company to a new market or opportunity you couldn’t reach before. Other options include government subsidies and grants and low-risk investments.

4. Diversify Your Investments

If your company’s investments are all in the same area, it puts your finances at risk. For example, some investments are more volatile than others, causing your finances to be in a loop of rising and falling.

Diversification means spreading your investments across different financial instruments. This strategy spreads risk across multiple areas — if one of these financial methods fails, you can rely on the others to maintain your cash flow. If your business takes a downturn, diversification can help you recover.

In the manufacturing industry, you can diversify:

  • Who you serve, so your company isn’t overly reliant on one customer and can withstand industry fluctuations.
  • Your staff to gain a variety of skills and work experiences.
  • Your products and services to reach new markets.

Role of Alternative Financing in Managing Financial Risk

Financial risk management is the process of assessing, controlling, planning for and managing your company’s exposure to risk. If your business is taking on a risk, you can manage your risk to make informed decisions and protect your assets. This approach can also:

  • Help your business recover and grow
  • Set up solutions to address these risks
  • Reduce your chance of financial loss
  • Put prevention measures in place

Alternative financing can help companies manage their financial risk. Alternative financing refers to funding from places other than traditional banks and financial institutions. These options address the gaps in the mainstream financial market, so you’ll have more flexibility and variety in financial solutions you can choose.

Many types of alternative financing are not debt-based and can provide access to quick funding, debt diversification and flexible repayment terms.

Types of Alternative Financing

Your business can take advantage of several types of alternative financing, including:

  • Invoice factoring: With invoice factoring, you can sell your outstanding invoices to another company to gain immediate access to working capital. This option is ideal if your company relies on AR with clients because it can prevent payment delays and maintain cash flow. Manufacturing companies can use factoring to purchase new equipment and raw materials and improve their cash flow.
  • Purchase order financing: Purchase order financing is a short-term solution that helps you cover the cost of products you need to fulfill purchase orders.
  • Asset-based lending: Asset-based lending allows your company to leverage assets to gain a financial relationship with a lender. In return, you can gain reliable cash flow.

Choose Alternative Financing Options From Porter Capital

Companies can minimize and manage their financial risks with alternative financing. These financing options can help you cover cash flow gaps, order supplies, meet payroll and more.

Add alternative financing to your company’s financial risk management strategy with Porter Capital. We are an experienced factoring company with a strong financial base to provide the funding you need in as little as 24 hours. We offer many alternative financing services for industries like manufacturingtechnologydistribution and more. Whether you’re a small startup or an established enterprise, we’re here to help.

Apply now for same-day financing for your company, or call 1-888-865-7678 to learn more.