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Home > Financing > Loans > Conventional

Risk management, not risk taking

Banks need to be repaid the principal loaned and the interest accrued in order to make money. The increasing pressure to create a return for shareholders is clearly at odds with taking risks that could result in losses or regulatory difficulty. Banks are risk managers, not risk takers. They must be as certain as possible of creditworthiness before extending credit to a business: bankers are acutely aware that it takes 10 to 20 times more effort to collect a bad loan than it did to make the loan. Clearly the principal key to getting a bank loan is strong management reflected in the financial performance of the firm, good communication skills, and a knowledge of the expectations of the institution.
Although there are always exceptions, the following are generally considered negative factors by commercial banks:

1. The company has been in business less than 18 months.
2. You or your guarantor(s) have no highly liquid secondary repayment source such as cash or securities.
3. Your company has not shown a profit over a sustained period of time.
4. You or your guarantor(s) have a poor credit history.
5. You have increased sales but profits have not matched that increase.
6. Your collateral is not highly liquid (for short-term loan) or you have insufficient equity in fixed assets (for long-term credit).