What Are Some Differences Between Business and Financial Risks?

The major difference between business and financial risks lies in where there is a shortfall. Business risk exists when there is not enough cash to meet the day-to-day operating expenses of the business, but financial risk involves the lack of cash necessary to pay creditors. One type of risk sometimes occurs in the absence of the other, or they may both happen simultaneously but independent of each other.

According to the Houston Chronicle, business risk has nothing to do with the amount of money a business owes the bank or those who invest in the business. It deals exclusively with not having enough money to pay the rent on a building, wages to the employees or suppliers of good to be sold. It even includes not being able to pay light and telephone bills or taxes. Systematic business risk occurs when the economy is bad, affecting most businesses. Unsystematic business risk applies to a specific company or type of company that is struggling.

Financial risk, on the other hand, deals solely with the lack of income to pay back borrowed money. Often when a business gets behind financially, the owner borrows the money to pay daily expenses. If business does not improve, he not only does not have the money to pay those expenses when they occur again, but now he has a financial obligation to a creditor he is unable to fulfill.