The Hidden Sides of Entrepreneurship (Part 2)
Lewis prepares to obtain his first commercial loan and learns to assess risk.
Obtaining a commercial loan can be an intimidating process. Success is not guaranteed, and a simple mistake can cost you dearly. Lewis has been running his construction company for 40 months. It’s growing, but he recently turned down a new project because he doesn’t have the necessary equipment.
How to assess loan risk
Lewis’s financial advisor suggests starting by researching equipment costs and calculating future cash flows generated by the equipment, establishing optimistic and pessimistic gross revenue scenarios.
The profitability of the investment depends heavily on the interest rate. The higher the investment risk, the higher the interest rate.
Is my business ready for a commercial loan?
Lenders will examine the business objectively and make lending decisions primarily based on their overall and specific risk assessments. Lenders compare financial statement ratios and line items with industry standards to evaluate financial performance.
Do I need collateral?
Lenders generally lend against collateral, which can be seized in case of default. Lewis can mitigate his loan risk by adding collateral: a personal guarantee on his home or a guarantee on equipment he already owns.