Is Your Business Risky? Can You Still Borrow to Fund It?

by Josh Biggs in Finance on 25th April 2021

Risk is a tricky thing. Not everyone agrees on what is risky. For instance, Warren Buffett doesn’t believe that beta – the volatility of the stock market – is an accurate measure of risk. Instead, he believes that the possibility of a permanent loss of investment capital is a better measure. Therefore, even some of the smartest minds disagree with the group intelligence applied to the stock market. And the same goes for risk in business ventures too. So, is your business risky? Can a cash advance or a loan be obtained for it? Let’s discuss it. 

Regular Cash Versus a Longshot

A business that pays money regularly provides a comfort level of highly visible cash flow. This is why a stream of regular dividends going back years is reassuring to investors. Similarly, in business circles, a business that sees frequent money arriving at a PayPal account and funneling through to the checking account may appear safer. Compare this to the payout of occasionally large commissions but nothing in between can look riskier even if the profit potential is higher. 

Is the Business Understandable?

When a business model isn’t easily understood by people outside of that industry or niche, then it’s harder to obtain a lending for it. Why is this? Because lenders are baffled and don’t have a clue what they’re being asked to do. Sure, they know your business requires funds, but they cannot assess a risk they cannot readily appreciate. 

Therefore, preparing ahead of time to explain it to someone who doesn’t work in that niche or industry is important. Talk with acquaintances with no vested interests to see if you can explain it to them and they get what it’s all about. Have them explain it back to you to double-check that they understood it (don’t just take their word for it). 

Also, prepare your elevator pitch. Get the explanation down to a science. You may want to perfect a written explanation in case you need to send this out by email or submit it digitally in applications.  

What Will the Funds Be Used For?

When considering taking a high-risk cash advance, it’s good to be clear what the funds will be used for. A vague answer won’t inspire confidence in the lender. Ultimately, you may decide what to use the funds for later or change your mind after the funds have been secured, but you still need to sound convincing either way. Also, from a practical perspective, the greater the risk, the higher the rate. So, you should be clear on how much is required and how it’ll be used to advance the business prospects. Otherwise, what are you doing?

Provide Documentation

While doing your homework on funding a project, you should obtain documentation on market size, successful competitors, and other relevant data points. Make a case for how you can profit from getting into the new market with sufficient money behind the effort. Show how different levels of funding can be used to create faster growth. Drill into the details to provide as much substantive information as possible. 

Whatever you can do to better explain your business and reduce its perceived risk level, the better. It will likely lead to a longer-term loan and possibly at a lower rate, making it more affordable. 

Categories: Finance