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September 2009
Risk Profiling
By John Blair

     Previous economic contractions have been finite in length and the current contraction will most assuredly end. In the abstract that is a comforting thought; but if you are a small business owner struggling to manage cash flows and remain profitable during an economic contraction, an abstraction provides meager benefits.

     Inevitably a time will come, however, when wafting across the troubled economic landscape is the rare air of recovery. For businesses that survive, a crucial factor to benefiting from the ensuing economic growth is adequate capital. If you own a small business, the capital you amass to grow your business comes from earnings. If that proves to be inadequate, your additional capital requirements are usually met by obtaining credit from commercial lenders.

     So it is important to understand the criteria these lenders use to make their lending decisions and to take appropriate actions to insure that you can obtain the credit necessary to take advantage of the next economic expansion.

     A caveat before we continue: Economic disruptions customarily precipitate a change in fundamental elements of the economy. As a result, some existing business models, products or services become obsolete or are replaced by something better.

     Economist Joseph Schumpeter described this change as “creative destruction”—an evolution of sorts for a product, service or business model consisting of a primordial inception and eventual extinction, e.g. pay phones and walkmans. So be objective in evaluating the viability of your product or service mix and your business model. No amount of credit, even if it can be obtained, will make a flawed business successful.

     An important aspect to appreciate about commercial lenders is that they are risk averse. The money they lend is not theirs. Nor is it the lending institution’s shareholders. They are intermediaries—clearing houses that match money from one group to those in another group that employ it in their business and return it with a contractual token of their appreciation commonly called interest.

     Commercial lenders compete in credit markets consisting of innumerable participants located throughout the world. At a recent presentation, Mark Vintner, managing director and senior economist of Wachovia Corp. (Wells Fargo Securities), stated approximately 78 percent of the available credit in the United States is made possible by a secondary market in which China and sovereign wealth funds purchase pools of credit card debt, auto loans and other loans originated in the United States.

     As a small business owner you are competing for a portion of the available credit.

Furthermore they make their money on the difference between the interest they pay to the entities whose money was lent and the interest paid by the entities that borrow it. Any money borrowers fail to return reduces their profit.

     While not the only risk, default risk is a significant consideration for commercial lenders. Default risk is the probability that the borrower will not repay any or all of the money lent. The key to encouraging a lender then is to lower their perceived risk of default from extending credit to your business. Specifically, take steps to lower your risk profile.

     The most effective means of reducing your business’s risk profile is to insure it has a consistent history of being profitable; a business not historically profitable or profitable only sporadically has a diminished chance of qualifying for credit.

     So continuously take actions to improve profitability. Analyze expenditures to indentify costs that can be eliminated, deferred or reduced. Ensure personnel are fully utilized and stifle that impulse to deduct personal expenditures as expenses. Doing so is not a wise tax strategy and it reduces the profits vital to securing the credit your business needs to compete in an expanding economy.

     In addition, as a small business owner you should continuously monitor it and indentify key personnel, critical vendors or significant customers which, if permanently or temporarily lost, would significantly impact profitability. Your business will have a dramatically lower risk profile if you develop a plan of action and contingencies that can be implemented if any of these were to occur.

     For key personnel, acquire life insurance coverage and develop appropriate management positions to reduce the importance of any one person; for critical vendors, identify alternative sources; and for significant customers, if possible secure long-term contractual commitments.

     The credit your business will need to develop opportunities as the current recession recedes and the recovery accelerates is a function of the efforts you make today to reduce your business’s risk profile.

     John D. Blair Sr. is a managing partner at Blair, Bohlé & Whitsitt, PLLC., a CPA firm that provides accounting, assurance, tax compliance and planning services in addition strategic planning and tax minimization strategies to privately held businesses. Contact him at 704-841-9800 or visit

John D. Blair Sr. is a managing partner at Blair, Bohle & Whitsitt, PLLC.
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