Taking out a business loan is an important decision that almost all small business owners makes at some point in their business. This decision affects us psychologically. Many negative feelings and doubts emerge when a business owner decides that they may need to borrow money.
Will I be able to pay back this loan? What happens if I use up all the money and not make any profit? Am I running this business down to the ground? Will taking a loan make me look weak? Can the company afford to borrow money? Will any lender approve me for financing?
The list of self-doubting questions goes on and on. Good news is, there is a practical, logical and analytical way to answer these questions. Here are three ways you can determine the risk of a loan:
To save time and money, you can leverage lending firms’ existing processes to determine borrowing risk. Going through this process gives you your loan amount, interest rate, or whether you can get a loan at all.
The loan amount and interest rate are indicative of your “borrower’s risk.” Lenders have underwriters that use a combination of accounting, financing, and actuarial sciences to determine your risk. So, for the majority of small business owners who aren’t experienced (or are aspiring) underwriters, determining your risk of borrowing is something you can’t estimate quickly. Instead of spending time and money, you can get a quick estimate of your borrowing risk by simply starting the business loan application and getting an estimate. The best part is, you are not obligated to get a loan just because you asked for a quote.
As one of Canada’s leading small business lender ourselves, determining borrowers’ risk is something we do every day. To determine your borrower risk, we run your financial statements through our battle-tested mathematical models. If you are somebody that is red-flagged as “high risk,” then we will decline you as a customer right now and tell you why. So, if your loan application gets rejected by us, you can safely assume that borrowing money will be difficult for you right now until your situation changes. Consequently, you should look for other ways to get financial capital.
In the lending business, we only make money if you make money. Due to this direct relation, when you default on the loan because you suffered a loss – we lose money. To avoid losing money to borrowers (risk of bad debt), we evaluate the risk associated with lending to a borrower.
Now you know the driver behind business lenders’ lending decisions, let’s talk about how we get around to doing it!
Here at Thinking Capital, we’ll ask you for:
These three pieces of information allow us to predict your business’s ability to make money. If you make a profit, then you can pay us back within the agreed upon time (amortization period).
Want to be able to measure your business performance so you can make more financially sound decisions? Then, just refer to your business financial statements to understand the risks associated with taking on a small business loan. Financial statements string together all financial aspects of your business, providing an overview of how money is flowing throughout your company.
Mapping this flow allows you to measure the risk associated with borrowing money. Start by running a simulation of the loan entering in your financial statements and measure whether your balance sheet can take the liability of a loan. If your business can take on this liability and still net a profit by the end of the amortization period, then you have a very little risk of borrowing money.
If you would like to understand more about financial statements and their usage, please refer to our free eBook. It provides you with a quick overview of the three types of financial documents that every business has. Individually, each document records specific financial information regarding your business. Together, they paint a clear financial picture for your business.
Advice and research for Canadian small businesses from our expert team