Enhancing Financial Risk Modelling For A Regional Development Firm: Navigating The SME Environment

This thesis enhances financial risk modeling for Horizon Flevoland's 'Groei Fonds,' which supports SMEs in their scale-up phase. The objective was to develop a robust, comprehensible financial risk model for loans and direct investments, addressing inaccuracies, opaqueness, and unintuitiveness in the current model. Combining qualitative and quantitative methodologies, the study began with a literature review to identify suitable financial risk modeling methods, followed by qualitative assessments of 'Groei Fonds' companies. The study tailored state-of-the-art credit, market, and liquidity risk models to Horizon’s needs, developing a Monte Carlo Value-at-Risk (VaR) model adaptable to the specific characteristics of SMEs. The model incorporated expert judgment in calculating Probability of Default and adjusted parameters to reflect the unique financial profiles and risks of SMEs. Designed for implementation within Horizon's existing framework, the model addresses data limitations common in early-stage companies and enhances transparency and informed decision-making. The transition promises continuous improvement and resilience in risk management. Future research should focus on improving models by gathering SME-specific data, validating models with historical data, and developing sector- and size-specific models to account for SME diversity.