Understanding Business Loan Risk Assessment: Get Expert Help from a Finance Broker

A man and a woman discussing business risk at a table.

Like any business, banks prioritize financial well-being. To minimize risk, they meticulously evaluate loan applications, assessing your financial strength to ensure a sustainable agreement. This is where a knowledgeable finance broker can come in, guiding you through the process and advocating for the best loan options based on your unique needs.

Let’s break it down.

What the bank considers

For any bank, a key concern when approving a commercial loan is the financial risk associated with the borrower's ability to repay the loan and interest on time. According to the Australian Bureau of Statistics, as of June 2016, the exit rate for Australian businesses was 12.3%. This means that 12.3% of businesses cease trading within a year.

To mitigate this risk, banks look for evidence that your business is likely to succeed and avoid becoming part of this statistic. This is where a finance broker can be invaluable.

Learn more about business loans.

Banks also consider:

Security: The bank will evaluate what you’re offering as security against your loan – this might be a family home or other assets such as stocks and shares.
Industry: Lenders view some industries as riskier than others, because of conditions such as competition, profitability and the economic climate. If your industry is seasonal, such as tourism or agriculture, they’ll want to know how you’ll manage repayments in the off season.
Cash flow: ASIC reports inadequate cash flow among the top reasons why companies become unable to repay debt. The bank will want to see what revenue you have coming in, and be assured you can pay wages, keep the business ticking and make your loan payments on time – even if something unexpected happens.

Show the bank you’re managing risk

Even with higher risk, securing a loan is possible. By demonstrating your awareness and proactive approach to risk management, you can increase your chances of approval.

Your finance broker can be a valuable resource in this process. They can guide you in creating a comprehensive risk management plan that details your business's specific financial and non-financial risks, along with the steps you'll take to mitigate or manage them.

This plan should be a living document, regularly reviewed and updated by you and your broker. Remember, effective risk management is a cornerstone of good business practices, regardless of your company's size.

Next, when preparing your loan application, think about what will convince the bank you’re on top of your business risks. Here are some ways to do just that:

Provide all the documentation the bank asks for.
Use a business plan to succinctly explain what your goals, objectives and target markets are with any forecasts that might help.
Supply solid evidence of your personal experience and credentials.
Make sure your financial records and forecasts are in good order (poor financial control and lack of financial
Records also rate highly among ASIC’s top reasons for company insolvencies.

Convincing the bank that you’re on top of risk management doesn’t involve smoke and mirrors. It’s about understanding your business, having robust practices, planning for the future and demonstrating you’re on top of any present or potential risk.