Get the right business financing: Understanding risk
Read time: 3 minutes
As an entrepreneur, you're ambitious for your business. You want it to prosper and grow. But, you may be wondering where to get the financing you need.
Understanding the risk your business and your project represent will help you find the right financing.
The link between financing and risk
To better understand risk, let’s reverse the situation and think about how you would invest your money in someone else's project. You would probably expect different returns based on the risk you are taking. The higher the risk, the higher the return you would want.
For example, let’s say your cousin wants to borrow money from you to buy new equipment. His business has been around for many years, it has predictable cash flow and valuable assets that can be sold if he doesn’t have the money to pay you back.
There’s always risk, but here it isn’t as great as with a less established company. And therefore the rate of return you expect will be lower.
Now, let’s say you meet another entrepreneur who wants to borrow your money. He has a great idea and is backed by a solid business plan, but so far he has no revenue and owns no assets to secure the loan. This is obviously riskier. Therefore, the expected return will be much greater.
Understand your risk to find the right financing
Your potential financial partners look at your project the same way.
No matter how confident you are in your project, they will judge how likely it is you will pay them back. Whether or not you get financing, what type of financing you get and how much you will pay for it are all directly linked to the risk your business represents.