How to Manage Funding Risk in Financial Institutions

By Aaron Brown

Part of Financial Risk Management For Dummies Cheat Sheet

Uncertainty about whether investors will provide sufficient funds is a challenge that every financial risk manager faces. Balancing these risks is essential to your success. There are a few things to consider.

If investors withdraw funding, whether by redeeming their stakes for cash or selling their interest to others at low prices, it may lead to a lack of confidence in your organisation and prevent you from raising new funds and encouraging other investors to jump ship.

Investors who are locked in for long terms, with few control rights, allow you to take a long view, but they provide you no pressure to succeed and probably charge a lot for their capital. Investors who can get full value back upon demand keep you on your toes, and charge less for their capital, but are unlikely to be true partners. However, if some investors withdraw, you have an opportunity to restructure your business to run in a better way for remaining investors.