How to Minimize Credit Risk Prior to Applying for Bank Loans

5 factors that play a role in risk assessment


While the media discusses the lack of business credit that's available for small companies it is necessary to realize that financial institutions as well as lenders do want to issue loans and extend financing to businesses; they are in the business to lend money. However, risk is the key and how much of it lenders are willing to accept.

Risk is based upon factors related to the company's sales revenues, credit standing, years in operation, and so on.

However, as a result of higher levels of scrutiny there are specific risks that financial institutions and lenders are just not willing to take. This doesn't always imply that there is no cash to lend it simply implies that the lending criteria have changed. The lower the risk the safer the returns are for the banks even if the returns are minimal.

Financial institutions and lenders are a lot more focused on providing loans and business credit lines to creditworthy businesses at a reduced rate, instead of a riskier business at a greater rate, simply because creditworthy borrowers are a much safer risk.

The borrowing parameters of large financial institutions are driven more by financial environment than anything else. For example, if the economy was booming then banks and lenders would entertain far riskier loans simply because the economic situation is in a healthy and balanced state.

So what can a small business owner do to be considered as a good risk so their company can get approved for a loan or credit line?

Each of these factors plays a role for loan providers when identifying risk:

  1. Capability - This is an examination of your capability to pay back a business loan or business line of credit. This includes cash flow, repayment history, as well as extra cash the company has on hand. The best way to reveal your ability is by having strong business credit ratings, a healthy bank ranking (minimum low 5 rating), a well-developed business plan and/or prior year(s) financials that show you have adequate cash flow to pay off the loan or credit line.
  1. Funding - It always looks more favorable when a business owner has his very own funds invested in the business. Before a financial institution will want to extend a business line of credit or loan to a company, the amount of skin an owner has in the game plays role. It may even be the distinction between an approval and denial.
  2. Security/ Collateral- Commercial property, heavy machinery, business devices, inventory, stocks as well as bonds, and various other company possessions that can be sold if a business fails to repay the financing are taken into consideration.
  3. Conditions - Be ready to confirm that the conditions are correct for your company. Show that there is market possibility, adequate positioning, competitiveness, and experience to back up your strategy.
  4. Character-- Lenders have to believe that a company owner is a trusted individual who can be depended upon to repay the loan or line of credit. Some of the things they check out include individual credit ratings, experience & education, as well as track record.

Before you decide to submit an application for funding, do not forget the value of personal relationships. Consider applying for financing at a bank where you already have a good business banking relationship.

Likewise, make an attempt to meet the individual who will be examining your application such as a bank's lending officer, rather than the teller that handles your everyday banking transactions.

By showing that your company is a good risk to the bank or lender, the greater the possibility you have for safeguarding the funding you need at the best rate of interest available.