It is a known fact that loans come with risks. It is also a known fact that virtually everything business has some risk associated with it. Risk is an integral part of business and understanding risks can help understand ways to control or reduce them. Through this article, we aim to explore the typical risks associated with business loans and reflect upon the risks merely – by eliminating jargon, complicated lingo, and technical terminology.
Simplifying the Risk Analysis Methodology
It is common to see risk analysis and studies related to it, featuring a style of language that is not suitable to the average reader – much of such text tends to contain industry jargon and complex technical terms that most people would not understand. This is one of the reasons why many small business owners never explore the topic in the first place. To address this issue, we shall be keeping this article simple and easy to understand for all our readers. We shall also keep the methodology simple so it need not involve much mathematics – simple logic and practicality shall suffice.
What Factors Increase Risk?
Various factors of a loan can make elevate the risk associated with it. While an exhaustive list is impossible to make, some of the major and common factors include:
- The lender: Various lenders can have varying degrees of legitimacy, transparency, reliability, and reasonability. Risk can be reduced by dealing with safer lenders.
- The loan rate: One of the most prominent threats related to loans is the expense associated with them. The loan rate along with its tenure typically decides how expensive the loan is.
- Potential to reduce profitability: The expenses you bear on a loan, are the factor that shall be impacting revenues directly.
- Potential to limit cash flow: The expenses of a loan can also significantly reduce your cash flow if not carefully calculated and accounted for.
- Collateral: If you’ve pledged an asset of value against which you’ve taken a loan, the risk of losing it in case of non-payment shall persist until the closure of the loan.
- Risk in non-repayment: Apart from security through collateral, many other terms may govern non-repayment loans that may dictate the risk related to non-repayment.
- The risk of falling into a debt cycle: When using debt products with compounding interest such as credit cards and line of credit or while using multiple loan products, there is typically a higher risk of falling into what’s called the “debt cycle”, which in effect leads to perpetual debt that’s hard to escape.
What Factors Counter Risks?
Various measures, efforts, and benefits associated with loans can help counter the risks that are associated with business loans. Common factors include:
- Choosing the right lender: Choosing a safe lender that offers what your business needs to match, is typically one way to reduce the risk that comes with loans.
- Investing wisely: Borrowed funds as well as the funds that are available with a business, when invested well can offer results comparable to or higher than the expenses related to a loan, making investments a powerful tool.
- Utilizing the loan efficiently: Utilized rightly, the money borrowed through a loan can get a business much more in return and have both short and long-term benefits for the business.
- Benefits of added liquidity: The importance of the availability of liquid funds can never be overemphasized. Loans can act as a source for added liquidity during times when that’s needed by a business.
Can Avoiding a Loan can be a Risk?
Avoiding a loan, especially when the business seems to need it, may also have risks:
- Limited growth potential: Oftentimes, businesses see limited potential when debt isn’t used. Debt products can make a business unlock new levels of potential.
- Issues related to cash flow: Cash flow can become a challenge and in such situations, avoiding a loan even as it seems required, can be a wrong decision too.
- Lack of emergency funds: Having a source to fund emergency needs is important. Some businesses use a line of credit or identify lenders whose services can help in such situations. When savings and available capital are not enough to address an emergency need, avoiding a loan can easily be a disastrous choice too.
- Loss of opportunities: Many opportunities can be made best out of, using funds. Some opportunities turn out to be worth much more than what is invested in them. If a loan can help capitalize on such an opportunity, avoiding it might risk losing the opportunity altogether.
Getting an Easy Loan for Your Business
Having gained a simple yet practical insight about the risks related to a business loan and also those related to avoiding a business loan when needed, you might be considering a loan for your business. We are here for you. We provide a quick and easy solution for financing various needs of a business through our business loans. Simply apply online and we shall work towards a loan offer to suit your needs.