In the United States, political risk isn’t something that you hear of often. The U.S. is considered by many to be one of the most stable governments in the world – at least until recently.
Over the past several months, there has been no shortage of bickering (to put it mildly.) These various standoffs have caused extreme volatility in the financial markets and the economy as a whole.
This is the very definition of political risk – “any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives.” – or, more simply, you could say that political risk is the risk that a country will make political decisions that have a negative effect on a company doing business within that country.
Although we are past the so called “Fiscal Cliff”, the environment leading to the final resolution of the issue had a profound impact on macroeconomic environment of the country.
Both consumers and decision makers within companies have lost much of their confidence in the political structure of the country. The Consumer Confidence Index, an indicator of consumers’ level of optimism on the state of the current economy and expectation of the immediate future, decreased in January 2013 to 71.3. This is the lowest it has been since December 2011. 35% of consumers referred negatively to the fiscal cliff negotiations.
No matter the industry in which you operate, when consumers’ outlook on the economy is declining, your bottom line will be impacted negatively. Political risk should be on your radar as a business owner.
What can you do about all of this? How can you insulate yourself from political risk?
Build a Stable Financial Base for your Business
The most straightforward way to hedge political risk is to ensure that you have the wherewithal to whether periods of difficulty. You should have a financial base in place that allows you to continue to operate when revenues are temporarily down due to macroeconomic factors outside of your control.
Outside of just funding the business out of your own pocket, there are a number of financial products that are specifically designed to provide the working capital needed to operate in periods of downturn.
Exploring Factoring to Stabilize your Cash Flow
Factoring is a way to finance your business like any other form of commercial finance. Though factoring is specifically geared towards increasing your working capital.
Factoring allows you to take a business invoice and sell it to a finance company. The finance company will purchase it as a discount, typically 80% of the invoice amount, and then send you the remainder – less their fee – once the invoice is paid.
It increases your cash flow and the amount of capital you have to work with as it gives you the ability to convert your accounts receivable into cash. You receive funds as soon as you invoice rather than having to wait for your customers to pay.
If a rough political environment causes business to slow or customers to stretch payments, funding is still available to keep your business running.
What to Look for in Factoring Companies
To be frank, factoring companies are a dime a dozen. If you look for a factor, you won’t have any problem finding one; though, that doesn’t imply that all factors provide equal service. In fact, it’s quite the opposite.
You should always perform your own due diligence when looking for a factor. The services they provide and their level of professionalism are key indicators for the quality of service you will receive as a client.
Factors are more than finance companies. They come along side your business as a partner in some sense as they will be directly involved with your customers. They will be sending invoices to your customers and they will be speaking with your customers during random verifications or the occasional collection efforts.
This works to your benefit when you have a stellar factor.
Their expertise in credit assessment will give you insight into your customer base that you may not have otherwise. The factor is relying on your customers for payment so they have a vested interest in ensuring your customers are creditworthy.
When an invoice becomes past due, most factors will follow-up directly with your customer. In a very courteous and professional manner, they should work with your customer to determine when payment can be expected. This saves you a tremendous amount of time and energy when invoices are past due.
Working with a factoring company should be convenient. Look for things like online factoring, accounting software integration and detailed reporting. The point of this type of financing is to increase the efficiency and efficacy of your business, not to be a burden.
Don’t go into 2013, unsure of how the political environment will affect your business. Be proactive and set yourself up for success regardless of what Washington does.