Managing the Risk of Small Business Loans, Strategic Risk Management - Article Example

Student’s Name: Review No.: 1 Source of article: Managing the Risk of Small Business Loans Author’s Name: Anonymous Date of Publication: November 23rd 2009 Themes: Investment Risk Management Commentary: 538 words Brief Summary of Article: There are various sources of loans for small company owners and businesses. These include Standard Business Loan, which is usually awarded by banks at a certain amount of interest. The applicant accompanies this kind of loan with various actions in case of failure of repayment. These may include seizure of assets (Kimberley, 2005). There may be also other restrictions from the lending bank such as, requiring you to sign up for a business bank account that allows you to carry out the transactions with them, which may be inconvenient to the applicant (Melicher, 2010). Loans may also be obtained from member of a family or friend. This type of loan is accompanied by loss of personal relationship in case of default. Entrepreneurs who want to fund their businesses with a small loan have to put in consideration the five C’s of credit (Chandra, 2005). This allows the lender to determine the creditworthiness of the applicant. Cases such as a loan beneficiary defaulting to pay back the loan are likely to be minimised. As a result, the lending institutions are made operational continuously thus preventing their collapse. It also helps the applicant to know whether he will be able to settle the loan after applying for it. This article gives a guide into ways in which small business loans can be analysed in order to know whether it is right for lending institutions to give loans to small business and company owners. Loans may also be obtained from Small business administration SBA’s. This is more guaranteed because in case of default by the beneficiary, the lender receives majority of his investment back from the government. Personal Commentary: The first way of analyzing credit worthiness is the use of capacity analysis as noted in the article. Repayment is the most critical of the factors to consider. It is important for the prospective lender to know how the applicant intends to repay the loan. The lender will review the cash flow of the business and the likelihood of repayment of the loan. Capital is also considered as a measure of credit Worthiness (Barbara and Raeburn, 2007). The lender will expect you to have taken personal risks to invest in the business you want to set up by investing personal finance and assets into the business before asking for funds from them. The other consideration is collateral or additional form of security provided to the lender. This acts as additional payment to the lender in case the loaned is unable to pay back the loan. A guarantee is also required before the lender accepts to award the loan. This person will pay the loan if you cannot manage to repay it. The fourth C is condition. Both the lender and the borrower should ask themselves whether the loan would be used for the purpose intended such as working capital and additional equipment (Tirole, 2006). The lender should also consider economic conditions within the industry, which are likely to affect the profitability of the business. Character also determines the creditworthy of an applicant. This is the character of the applicant in terms of trustworthiness of the applicant to repay the loan, his educational background and experience in the business industry as well as the experience of his employees. References Barbara, W. and Raeburn, V., 2007.The Rational Guide to Building Small Business Credit, London: Mann Publishing. Megginson, L and Smart, B 2008, Introduction to Corporate Finance, New York: Cengage Learning Publishers. Tirole, J., 2006. The theory of corporate finance, New York: Princeton University Press Student’s Name: Review No.: 2 Source of article: Perspectives on strategic risk management Author’s Name: Juul Anderson Date of Publication: 2006 Themes: Strategic Risk management Process Commentary: 554 words Brief Summary of Article: Strategic Risk management is an important aspect when a company is operating within a specific industry at a specific time. There may be shifts in consumer preferences and emerging technologies that make a product line which is out dated (Andersen, 2006). There may also be market forces that put a company into danger of collapse. Strategic risks can be counteracted by putting in measures that constantly solicit feedback so that; changes are effected in good time. This is because, occasionally, the situations in a business or industry are changing so fast that it is not possible to predict about the future (Andersen, 2006). Companies will ensure that they are prepared for the future as well as, ensuring that they are well equipped to deal with a range of outcomes that affect their current situations (Simkins, 2010). This article explores the current techniques to long term strategic planning and risk management. Personal Commentary: According to this article, the banking sector has the capacity to secure funding is an important task. This has been achieved by banks even during difficult moments as; it has effects on other banking activities. The banks have to consider the need to reduce advantage at their institutions as well as, understanding the consequences of deleveraging at other firms. From the perspective of strategic management, bank directors must examine their current and future funding conditions in light of current deliberating, its short-term projections and state of overall insolvency in financial markets (Segal, 2011). Financial institutions rely on external sources of funding such as retail deposits, inter-bank lending and debt offerings. They must be aware that, their funding is subject to vagaries of the market such as sudden shortage of funds and rapid changes in investor sentiments (Andersen and Schroder, 2010). For instance, banks may get some funding from deposits but may have trouble in getting other sources of funding and find the condition persisting for some time. In recognizing the intrinsic leverage in the business of banking, institutions must examine long-term effects of funding and liquidity and to base their organizational strategic plans on those leverages. Bank directors and top officials need to mitigate possible difficulties in funding the banks. They should also demand solid contingency to be in place as well as, updating it for funding and liquidity problems. Such plans may involve potential likelihood of external factors to contribute to reduce funding of the institution, even in conditions, when risk and position profiles have not been materially changed. Banks directors should also be prepared for sudden changes in pricing and availability of funding sources that lead to the current financial turmoil. They should stop focussing mostly on building market share, improving revenues and focussing on short-term profitability of their operations (Andersen, 2006). These are characteristics of a bank not fully prepared to undertake overall risk management in their overall corporate strategy. In addition, when undertaking strategic management for funding and liquidity, potential liquidity problems on both side of the balance sheet should be considered. In situations where there is market wide scramble for liquidity, banks have to be prepared to manage funding difficulties and unplanned asset increment at the same time. By developing strong strategic risk management process that recognizes the importance of funding on either side of the balance sheet, directors and top managers can ensure that they are ready for such outcomes. References Andersen, J. 2006, Perspectives on strategic risk management, Copenhagen: Copenhagen Business School Press. Andersen, J and Schroder, W, 2010, Strategic Risk Management Practice: How to Deal Effectively with Major Corporate Exposures. London: Cambridge University Press. Segal, S. 2011, Corporate Value of Enterprise Risk Management: The Next Step in Business Management. London: John Wiley & Sons Publishers. Student’s Name: Review No.: 3 Source of article: Managing Reputation Risks Author’s Name: Anonymous Date of Publication: November 23rd 2009 Themes: Prevention of Reputation risks in financial sector Commentary: 563 words Brief Summary of Article: Reputation refers to what the public say or believe the business is like. This affects their attitude towards making transactions with the business. Generally, it is assumed to be a measure of how positive the public and prospective customers view the business. Reputation has direct effects on a company’s (Reyner, 2003). Management of these values stretches into cultures and how employees are motivated. The most important risk is the damage to reputation. This can be caused by occurrence of strikes at the core of businesses operations. According to (London Public Relations consultants Chelgate) businesses are more exposed to reputation risks today than any other time (Larkin, 2003). This is due to the fact that, we are living in an age of corporate accountability. The public wants to know what the business is involved in as well as, have a say on it. There are also patterns of communication such as social media like face book and twitter that allow messages to be passed more quickly and allow actions to be mobilised rapidly and effectively than before (Agyei-Ampomah, 2008). Reputation risk can be managed by first understanding your business reputation and how it works for your benefit. Reputation risk management is important because when a company loses its reputation, customers do not come to the business and a lot of billions of investments are lost. Investors are also unwilling to invest in the company. This article tries to explain some ways in which reputation risk can be prevented in financial sector. Personal Commentary: The article recommends that the financial institutions rely on a combination of market discipline, fitness and properness to deliver an environment of regulation at low cost and high level of global competitiveness. Another way of maintaining reputation is by training (Collier and Agyei-Ampomah, 2008,). This ensures financial firms do not take risks with their reputations and shareholders’ capital. According to (Adam Smith and Milton Friedman) businesses should be conducted in social context to maintain its social legitimacy. Reputation can also be maintained by ensuring assessment of transactions involving weapons handling, outlawed products and others that are likely to cause reputation of the company to be low (Reynar, 2003). The financial institutions are also required to come up with Committees responsible for assessing compliance with internal standards of their respective companies. Companies are also required to comply with basic legal and regulatory procedures as well as the required international standards and obligations for their operations (Reynar, 2003). These include embargo regulations, directives of the Financial Action Task Force on Money Laundering (FATF), The World Bank Standards, Global Compact Principles and the Finance Initiative of the United Nations Environment Programme (UNEP FI). In addition, the presence of risk treatment may form the basic management element which is focused to cope up with the identified and quantified operational risks. This usually focuses on the avoidance of these risks meaning that, the organization avoids taking the risks, risk mitigation which is a strategy which intelligently minimizes risks in development, risk transfer and sharing which is intelligently passing of risks to third parties and lastly risk acceptance. References Collier, M and Agyei-Ampomah, S, 2008, CIMA Official Learning System Management Accounting Risk and Control Strategy. Copenhagen: Butterworth-Heinemann, Larkin, J, 2003, Strategic reputation risk management. London: Palgrave Macmillan, Reynar, J, 2003, Managing reputational risk: curbing threats, leveraging opportunities. London: John Wiley & Sons. Student’s Name: Source of article: Enterprise risk management. Author’s Name: Van Deventer, Van Deventer, Donald R., Kenji Imai and Mark Mesler Date of Publication: august 15th 2004. Themes: risk management in enterprises Commentary: 533 words The future – Enterprise risk management. Brief summary of the article Apparently, when an organization becomes substantially successful, then it becomes more averse to taking risks. This evident in this article as, the act of taking risks is quite essential for companies to adopt changes and induce some innovativeness. EPM (enterprise performance management) is seen by experts as a broad idea of integrated methodologies. Enterprise performance management is vital and important parts of how a business enterprise should organize itself hence realize its strategies and, maximize its value to stakeholders both in the public and business sectors. This surmises that, the meaning that the EPM should be accompanied by a much broad overarching concept referred to as the enterprise risk management (ERM) There is also much hyped acronym the GRC usually used in risk management. The G usually stands for governance which is considered as the steward of company executives to behave and act in a respectable way like providing appropriate safe working environment for workers or formulation of effective and workable strategies. The C means compliance which means adherence to some laid down regulations as operating under the set laws in business while the R stands for risk management which is much concerned with performance management. Personal commentary According to this article, the compliance to regulation and governance forms government legislation. Such as; the Basel II and the Sarbanes-oxford which clearly remains etched in the minds of many business executives (Van, Donald, Kenji and Mark, 2004). Also accountability and responsibility are quite vital and cannot be avoided for success to be achieved in any business (Bent, Nils and Werner, 2003). If the business executives make crucial mistakes concerning governance, they are bound by the law and held responsible, a feature which can even see them go to jail and as a result international audit controls have been reinforced to ensure they are fool proof. Nevertheless, the foundations basing both the ERM and EPM share two beliefs that – it’s usually better when there is less uncertainty about the future and if the risk is not measurable, then it becomes unmanageable. Personal commentary Even though there might be hundreds of risks which might be identified in a business’, enterprise risk management is better understood by categorizing the risks. Identified risks in a business environment can be categorized as – operational, strategic, financial or hazard or they can be grouped as either internal, external controllable or uncontrollable as noted by (Van, Donald, Kenji (2004). There is also an alternative risk categorization which is; Market and price risk- this is the risk that a possibility of an increased product or service supply will lead to a rapid and aggressive reduction in prices and consequently negatively affect the profits (Bent, Nils and Werner, 2003). Credit risk which involves this is the risk that a business’ customers will fail to pay for the goods or services rendered. Operational risk: this is the risk of imminent loss usually resulting from inappropriate or lack of enough internal strategy, processes, people and technology or resulting from external events. 1. Legal risks- this the risk from litigation or from regulatory authority penalties. This is the risk which might occur from inadequate net positive cash flow or from exhausted capital equity raising or cash borrowing capabilities. References Bent, F, Nils, B., and Werner, R, 2003, Megaprojects and Risk: An Anatomy of Ambition .Cambridge University Press Van, D. Donald, R., Kenji, I. and Mark, M., 2004. Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management. Lam, James (2003). Enterprise Risk Management: From Incentives to Controls. Article 5 Source of article: Report of the board of banking supervision inquiry into the circumstances of the Collapse of Barings, 1995 Author’s Name: Bank of England Date of Publication: 1995 Themes: credit risks in banks and other financial institutions. Commentary: 600 words Financial institutions Brief summary of the article Banks and other financial institutions are facing a sea of changes and are currently facing an environment marked by increasing consolidations among institutions, high customer expectations increasing capital market regulations innovation and high mounting competition from other institutions. These factors have greatly increased the likelihood of failure or from the operations point of view usually resulting into increase focus on management of operational risks. The operations risks have often resulted to the downfall of numerous banks and financial institutions which of late has seen the downfall of more than 100 institutions with aggregate loss of more than US $100. The banks and other financial companies are currently demanding a much greater level of insight and knowledge by the directors on information regarding the risks which are been managed, how the set controls are effective to try and mitigate them. Much more comprehensive compliance regulators like the Basel 11 and the Sox call for much focus on the operational risks thus forcing the banks and other financial institutions to try and identify, quantify or measure the risks, evaluate them and then control and manage the risks. This has then resulted into much focus and emphasis on the need of having and implementing a sound operational risk management (ORM) practice in place especially when dealing with internal capital assessment and allocation processes thus making ORM one of the most complex and rapidly growing risk disciplines in these institutions. Personal commentary Operational risks are the potential loses which are associated with a business operating or working at the broadest sense. These risks normally come into existence as soon as an organization uses workers or systems in the processes or when it is affected by other external impacts and hence they usually emerge long before the market or credit risks are entered into. Experience has shown that operational risks are significant causes of financial loses especially in the banking sector an appropriate example is the case of Daiwa bank and Barings where business dealings were performed with the sole intention to defraud and the loss is spawned by market risk but in reality caused by operational risk which is the organizational and the shortcoming of fraud. In contrast to this the loses from German Schneider affair was attributed to the default of debts from customers which in real sense is a typical case of credit risk which is the cause but this was related to the insufficient processes of revising the credit standings and the granting of loans. By nature, operational risks are characterized by either as being inherent to the corporation, specific meaning that it’s in precise form and all measures geared towards either mitigating them or controlling the m strongly depends on the specific business or categorized as a cultural risk. Methods of operational risk management The act of risk management usually forms a key tool in supporting the management to achieve the company’s objectives in the business. According to a definition in Basel II, the way people conduct themselves in a business usually forms the cause of operational risk. This means that the entire work environment is of great concern in implementing. The operations risk management is therefore seen as a cycle starting from the identification of the risks, the assessment of the risks, risk treatment and finally monitoring of thee risks. For a business to control the risks, then it is apparent that it should first ensure that it knows the potential risks (Bank of England, 1995). For a bank to assess the risks, it should put into consideration several factors which may include the types of customers, loss database, scenario analysis, design, implementation and the overall effectiveness of the processes and systems etc. Key risk indicators (KRI) usually provide more cognitive information regarding the risk of significant future losses. Some of these KRI’S are: staff fluctuation rates, internal audit findings days of sickness leave, and the wrong account entries. In addition to the risk indicators, we have key control indicators, key performance indicators and key management indicators. References Kaplan, S., Mikes, A., Simons, R., Tufano, P., and Hofman, M., 2009. Managing Risk in the New World. Harvard Business Review, October, p.72 Waring, A.and Glendon, A., 1998. Managing Risk. London: Cengage Learning p.65 Bank of England, Report of the board of banking supervision inquiry into the circumstances of the Collapse of Barings, 1995, cited from: http://www.numa.com/ref/barings/bar00.htm Read More