This blog post on the factors to consider before giving business loans to entrepreneurs is prepared to answer a question that was asked on the comment box of a previous article on financing challenges faced by small businesses.
We now have businesses that are in businesses just to give loans to small business owners. Unlike full fledge financial institutions that have dedicated risk management team that deals with stuff like this, smaller loan companies sometimes struggle to make decisions when it comes to extending business loans to entrepreneurs.
9 Important Factors to Consider Before Giving Loan to Entrepreneurs
Business Model
The business model of any venture is the force that propels other aspects of the business forward. Every other thing quickly comes to nothing when the business models are based on weak philosophy. As a company in the loan advancing business, you have to be a master in evaluating and appraising any given business model otherwise you end up giving loans to worthless ventures. I have written an article that explains the meaning of a business model and how to develop one.
Demographics of Their Customers
The demographics of the entrepreneur’s customers (this could be the market they are targeting) is x-rayed through the business model of the potential debtor. Business model that require fast pace technology in order to be successful will not likely be best for a business that has predominantly aging customer base.
Caution should be the watch word here as it might just turn out to be that the company your about to lend money is experiencing problems due to the fact that technology is negatively affecting their business
Credit Ratings of Owners
The importance of credit rating in businesses is so significant that ignoring it will be tantamount to buying a used car without getting it certified by your mechanic. The extra cost of carrying out this one step in the overall due diligence process is worth its weight in gold as it will help ensure the safety of your investment. After all, what is investment if we cannot keep it safe?
Geographical Location of the Company
Although we now live in a global village but, that does not make it any less important to consider the physical location of a small business before giving out business loan to them. At the very least, the laws of the country where the business operates from should be reviewed so as to ensure that all regulatory requirements are met and that there is something to fall back to if need be.
Prospects in the Company’s Products
Comprehensive product life cycle analysis has to be performed before giving loan to an entrepreneur. The can be done using a very popular model known as BCG matrix. The aim is to ensure that the company does not have too many dying products in its portfolio.
Personal financial contribution of owners
This is a golden rule that must be followed at all times except you are a charity organization that wants to give out money to the needy. An entrepreneur must have some serious financial stake in a business for them to take it seriously. Venture capitalists and business angels are exception to this rule as they in most cases have vested interest in any business that they extend money to.
Experience of Key Players
Experience they say is a good teacher. Entrepreneurs that are experienced in the right way will always manage a business. I personally look out for streetwise-ness in every acclaimed entrepreneur. Make sure that the key players are very experienced.
Risk Attitude of the Entrepreneur
Entrepreneurs are by nature risk lovers and the risk attitude of the owners must be aligned to the philosophy and policies of the loan company.
Net Worth of the Owners
Net worth of the business owners acts like the icing on the cake as this only add more credibility to other factors that we have already discussed. Every lending institutions and businesses have a standard to measure this against. If your organization does not have one, this is the right time to do so.
Conclusion
We have briefly discussed the factors that must be considered advancing business loans to entrepreneurs but please note that the factors discussed above are not exhaustive but are the most important factors to consider before giving business loans to small business owners. If you have any question that is not answered by this article, please do leave a comment below and I will endeavour to provide an answer.
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