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.