Financing risk

Financing Risk ( English financial risk ) is in Finance is a risk that an economic subject financial instruments not, not in the expected extent or no longer available and thus payment problems or even bankruptcy threatens.

General

Financing risks can occur with all economic subjects, so that private households , companies or the state can be affected. The starting point for all economic subjects is financial planning , which should also ensure that financing risks do not arise. For all economic subjects it is true that a high financing risk is expressed in a high level of debt and vice versa. Missing or insufficient maturity congruence , missing follow-up financing and missing rollover , pre-financing , full financing or unsuitable financing instruments represent a financing risk. Project financing also includes interest rate risk , exchange rate risk ( exchange rate risk ), refinancing risk and inflation risk as financing risks .

Due to the peculiarities of each economic entity, the financing risks are sometimes different.

By choosing the right capital structure , solvency can be secured in the long term, financing risk and capital costs can be minimized and the company value can be maximized. When founding a company, there is a significantly higher financing risk compared to established companies, since uncertainties about future company development, capital requirements and debt servicing ability often go hand in hand with the founder's business deficits, insufficient equity base , initial losses and a lack of access to the capital market . Even shareholder can own capital - particularly in family enterprises - with private financial constraints contribute to financing risks. With a debt-free investment ( ) there is no financing risk, but the higher the level of indebtedness, the greater the financing risk due to financial leverage . ${\ displaystyle debt capital ratio = 0}$

Financing risks are also increased by high borrowing ratios when interest rates rise , which also has a negative impact on other debt ratios.

All public budgets can be affected by financing risks. The state budget is to be examined on behalf of all of them. While the budget estimated government spending are largely safe to predict the development of dependent government revenues from the planned economic development from. If the forecast economic growth turns out to be lower or does not materialize and / or if the unemployment rate and / or the inflation rate are higher than expected, government revenues decrease with a simultaneous unexpected increase in government expenditure ( social benefits ). Financing risks can arise in the national budget for economic reasons. The problem is exacerbated when net borrowing is required to balance the budget , which increases national debt and thereby contributes to future financing risks.

International experience shows that public investments (such as infrastructure projects ) are often associated with financing risks because delays in construction times and / or additions result in increases in construction costs that were not foreseen in the financing plan.

Financing risks are often not or not fully recognized due to a lack or lack of general financial education . If they are recognized early on, private financial planning must prevent conceivable financing risks. They arise when the unavoidable expenses (due to legal or contractual obligations ) exceed the income in the short term. This can result on the one hand from falling income ( unemployment ) with unchanged consumer behavior , on the other hand from excessive credit , which results in debt servicing that is no longer acceptable . Purchases that are too expensive or unnecessary must be financed in whole or in part by consumer loans (for household items and motor vehicles ) or real estate financing (for residential properties ), which make other expenses impossible due to high debt servicing. If the debt service quota exceeds 40% of gross annual income , there are considerable financing risks for the private household, which can lead to insolvency , over-indebtedness , loan termination and ultimately personal bankruptcy. Another financing risk is that the apartment rent can rise disproportionately to income due to a lack of housing and exceed the reasonable rent burden rate of 40% of the annual net income . In 1970 this proportion was 15.5% and in 2018 it reached 27.2% in Germany.

The financial risk - which sounds similar in terms of the word - is a risk that only occurs in companies and is made up of market risk , counterparty risk , liquidity risk and counterparty risk and is therefore used in a different context.