Preferred Financial Consulting
Supporting your needs for business advice and management consulting
First … the bank’s perspective:
Lending is really simpler than it looks. Banks want to lend money. Think about it for a minute. They invest depositor’s money in their portfolio of consumer and business loans.
The difference is their profit, right?. … Well not so fast. Banks pay depositors interest. They can also rent money from the Federal Reserve Bank. They have a few other choices, but suffice it to say, they have a real cost of funds for the money they rent (lend) you. Speaking of cost of funds, they have employees, lenders, tellers, administration, auditors, etc. Let's not forget their buildings, computers billing statements, postage, collectors and attorneys. When you count all their overhead, banks make between 1/2 to 2% profit on each loan. For every dollar of loan losses (defaults where the principal is not paid) the bank has to make between 50-200 loans to earn the principal back. My point is that they want to rent you money, not give you a grant.
Why should I have a business risk analysis completed? The riskiest business loan is not a formerly bankrupt customer, or one who has tax liens. It is the owner who does not understand the risk in their own business. Equally important, if you understand the risk in your business, then you can manage the risk for both the bank and yourself. Many entrepreneurs are already risk focused. Many find it helpful to get an outside opinion from a business consultant.
What are banks looking for? First, most banks are very good. However they change their pallet for risk based on how the other loans in their portfolio are performing. This change looks very odd to bystanders who don’t know the bank’s portfolio specifics. I hear many stories of a business applying for a loan at a bank where a business acquaintance received a loan, only to be turned down themselves. The bank’s bottom line is the risk profile of the business and the degree to which the owner/principals understand their own business. We, at Preferred Financial Consulting “talk risk” to key players in banks, therefore we can save you false starts from applying at bank after bank.
Do I have to guaranty a loan? Yes! A bank will want you to be fully at risk for your business’ success or failure. It makes sense in that you have everything to win. If you achieve substantial profitability, you keep it. The bank’s upside is only 1/2 to 2% for their rented money. Therefore they want their principal back. Lenders who take substantial principal risk also take a piece of the profits, i.e. Venture Capital.
What is involved in a risk analysis? We analyze your business plan (written or verbal), your financial statements, perform a site review, and interview management. Risk analysis’ can be short or involved depending on the company, industry and degree of management’s previous analysis. Call us today for a bid.
Preferred Financial Consulting © 2005
FAQ — Business Risk
To contact us:
Preferred Financial Consulting or
Preferred SBA Packaging
8863 Greenback Lane #210
Orangevale, CA 95662