What Makes a Business Riskier to Lend To?
Not all businesses carry the same risk. There are many factors to consider when determining how risky a company’s operation is. Will it have the legs to deliver longevity, or is it likely to fizzle out quickly?
In this article, we give business owners a clearer sense of how to assess their business (and others they may wish to acquire). This way, they’ll know if they have the potential to borrow against them to fund growth or if they’ll need to go it alone.
How Long Has the Business Been Operational?
For new businesses, they usually haven’t been around long enough to warrant lending against them. Certainly, there’s some leeway here if the business is showing an impressive growth trajectory and it has great promise. However, for many new small businesses, a local lender isn’t going to be interested because the risk is deemed too high.
For long-established businesses, there’s less concern about newness. Nevertheless, older businesses may not have evolved with the times and are now in need of funding because their fundamental business model is poorly optimized. So, older businesses aren’t necessarily a “safe risk” either. It depends on many factors.
Does the Business Rely on Imported Goods from Abroad?
One weak link in the chain that has become more apparent recently is whether the business relies on imported manufactured goods (or parts which are assembled to a finished product in the United States).
Any major disruption in the international supply chain and the business will quickly get into a situation where it cannot continue to trade unless it can find an affordable local supplier.
Is It Already Cash Flow Positive?
Is the business currently throwing off cash but it’s just that it needs more money to fund growth than it’s retaining in the business?
Or, is it hemorrhaging cash and requires money to stem the tide for a while until the company achieves profitability?
The former is understandable and not that risky. The latter situation may be on a fast-growth track or it could be a sinking ship trying to stay afloat for a few more months.
What is its Credit History Like?
If the company has previously defaulted on an overdraft or lending facility, or perhaps has overdue invoices to be paid, then its credit history likely has sustained a meaningful hit. As such, it automatically becomes more difficult to find a lender.
For businesses that fit into some of the categories outlined above or that have failed to meet some previous financial obligations, they represent one of the high risk options for lenders. That doesn’t mean a business lender cannot be found, but understand that getting approval from the main street lender will be doubtful. A specialist is required that understands businesses better.
Each business is unique. Subsequently, they’re usually not all high-risk ventures; it’s a matter of degrees of risk and sometimes the perspective too. A lender that likes lending into high-risk companies on a growth path won’t see this as risky whereas another lender might. Therefore, finding the right one is often necessary to get approval for funding.