Business Funding Secrets
Business Funding Secrets

Perceived Risk & Business Loans

by Brad MacLiver, authorship and profile at: Google

 

When a person buys a large appliance, big screen TV, etc. there is some hesitation due to wondering whether or not it is a quality brand, does the new model have any flaws, etc. Many people will buy extended warranties to offset their fear that their purchase will break the day after the factory warranty expires. This “perception” that there could be a loss is a perception of risk.

 

Many business fields such as behavioral accounting, consumer behavior, marketing, and behavioral finance study perceived risk. There is no doubt that peoples’ feelings, values, and attitudes influence their decisions. This is also true with Lenders, Venture Capitalists, and others providing business finance.

 

There are a number of risk elements: company specific, industry risk, general market risk, and as we have seen in the past year - the entire economy. Lenders can use simple calculations to help determine the general elements of risk such as looking at the loan to value. Whether real estate or equipment if the asset has a much greater value than the loan the Lender obviously will consider the risk of loss to be less.

 

Something much more difficult to calculate is Perceived Risk - the “feeling,” which the lender may have about the potential business loan. Whatever the real facts are regarding the specific business, industry, etc., there can be an opposition to making the loan based solely on perception.


As an example of how perceived risk can affect a company: There was a large well established company that had a long standing relationship with a major bank. Although the company had consistent sales ($100M+) and there was not any evidence that sales were currently declining, or would in the future, the bank determined that with the current economic conditions that there was additional perceived risk, so the bank cut off the company’s line of credit. This action immediately affected the company’s cash flow and sent the once viable company into bankruptcy. The perceived risk became a reality.

 

If perceived risk can destroy a long standing well established business, then all companies requesting funding need to address all aspects of risk that they face. When submitting a business plan to a Lender provide sound reasoning of how the company’s management plans on dealing with – both statistical and perceived.

 

Tips:

1. Lenders may misperceive risk associated with a specific company or industry because they lack certain information. Without accurate and detailed information Lenders can make an incorrect judgment.

 

2. Even when there is reliable statistics to address the common elements of risk, be prepared to address the Lenders perceptions of the economy, the industry, etc.

 

3. Garbage in Garbage out. Don’t be lazy when writing a business plan. Provide depth of detail to address all aspects of risk - real and perceived.

 

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