Understanding Your Business’s Risk Profile

Business Risk Profile

Many small business owners understand the basics of small business loans. When it comes to borrowing, your business’s risk profile is another factor that lenders look at and it can have a significant impact on loan approvals.

In this article, we explain what a business risk profile is, why it matters and share tips to help you improve yours.

What is a business risk profile?

 Simply put, a business risk is any short- or long-term factor that represents a direct or indirect challenge to a business’s ability to successfully operate or grow. From a lending perspective, any such risk impacts a business’s ability to repay a loan and the more risk factors a business has, the higher its risk profile.

How do small business lenders evaluate business risk profiles?

Every lender establishes its own baseline “lending policy,” which basically specifies the minimum criteria that must be met for a loan application to be considered and eventually approved by them.  For example, most banks require a minimum of two years of operation before they can consider financing a business. Similarly, some lenders choose not to fund businesses in certain industries because they view these fields as inherently high risk, due to high rates of business failure, competition or other liabilities.

When it comes down to it, all lenders have different “risk appetites” or levels of risk they’re willing to take on. A lender’s “risk appetite” depends on their lending policy, goals, missions, and capacities to lend– and for nearly all businesses, there’s a funding option. It just may take a little more research to find the right fit for your business.

What’s your business’s risk profile? Common risks that could impact your business’s ability to get a loan

Financial Risks: When assessing your loan-readiness, lenders will look at how your business financial history could impact your ability to repay a loan. Here are some common factors that lenders will look at when evaluating your business financial risks:

  • Performance trends: Adverse changes to key performance factors, such as declining revenue, loss of profits and declining profit margins can signal the beginning of looming financial troubles and can raise questions about sustainability of the business.
  • Debt: High amounts of debt can indicate that a business has historically had trouble managing its cash flow or is using debt to fund its operations. In these cases, high debt could be symptomatic of larger financial and operation issues.
  • Revenue sources: If a high concentration of your revenue is coming from a select group of clients, a lender might question if your current revenue is sustainable. In other words, will your revenue be dramatically impacted by the loss of these clients?
  •  Financial management: Issues such as inadequate bookkeeping systems, inaccurate financial statements, profits not being properly utilized, not collecting accounts receivable efficiently and not paying bills on time, can be signs of potential financial mismanagement and can contribute to your business’s risk profile.

Operational Risks: Lenders also look at factors that could impact your business’s day-to-day operations and ultimately affect your business’s reputation, financial health and ability to repay a loan. Below are some factors that could increase your operational risks:

  • Compliance to regulations: Factors such as failure to update business licenses and certifications, failure to pass inspections, costumer complaints, an absence of signed rental agreement with your landlord or lacking adequate insurance are all operational risks that can prevent your business from running effectively and even legally.   
  • Operating environment: Businesses that operate in highly competitive environments and industries, like restaurants and retail, are considered inherently risky. Additionally, lenders might also evaluate the risk of working with businesses that operate in high-risk areas, such as those prone to natural disasters, or areas or industries that are extremely sensitive to geopolitical factors such as tariffs, trade negotiations and fluctuations of commodity prices.
  • Human resource and management capacity: Problems related to inadequate staffing, high employee turnover rates, lack of effective management, human resource complaints, and more can reflect poor business management.

Research lender criteria

Understanding your business’s risks and how they compare to a lender’s risk criteria can help you:

  • Save time: If you know that your business doesn’t meet a lender’s basic criteria, you can focus on those who are better positioned to help.
  • Plan for potential problems: Knowing your business’s risks helps you make informed decisions to mitigate any perceived risk. For example, a business that incurred recent losses may create and present a growth plan as part of their application to show lenders that they have a concrete plan for turning their business around, and are prepared to answer the lender’s questions.

To learn about the lending criteria that different lenders use, simply ask or visit the lender’s website, where their eligibility criteria is usually listed.

Strategies to reduce your business’s risks

Though you may not have control over certain measures of risk, such as which stage of operation your business is in, there are other risk factors that you can proactively impact:

  • Get a better grasp on your financial position: If your business isn’t currently profitable, ensure that you know why and that you have a concrete, realistic and viable plan to address any shortcomings.
  • Make business planning an integral part of management: Consider key factors driving or hindering growth and how to leverage or address them.
  • Educate yourself: Continue improving your business management skills by reading resources, such as Excelsior Growth Fund’s business resource library, attending free webinars and joining small business mentorship programs.

For more information about your business’s risk profile, how to improve it and how to find viable funders for your small business, talk to the business advisors at Excelsior Growth Fund (EGF) – it’s our goal to help small businesses get the funding they need and be better positioned for success.