Business Financing
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Portfolio Risk Management

As mentioned in the previous section, the cost of business financing is directly related to the degree of risk that a lender or debt provider is willing to take on when providing funds to satisfy a business financing application.

The risk that is calculated by a lender has to also align with the supply and cost of money available to the lender so that a spread or margin can be built into their pricing.

Using the equipment financing market again, an equipment financing company has access to a source of capital that is prepared to advance capital to the finance company to fund loans and leases that are fully secured by equipment and potentially other assets pledged by a business or its shareholders.

In simple terms, if the equipment finance company can borrow funds for 5% and build in a margin of 2%, the end customer will be provided with an approval for 7%.  The margin, just like the margin built into any other business, has to cover operating costs and profits.

In the case of banks and credit unions, they are focused on the lower risk end of the lending spectrum and typically only provide pricing related to business financing applications that they determine to provide low risk of loss.

With more specialized lenders like equipment financing companies, they typically will provide pricing over a broader spectrum of risk.  So instead of having one basic pricing point, they may have several, and for each pricing point, the risk assessment, cost of supply, and customer pricing are going to be different.

This broader risk spectrum approach is designed to cover a larger percentage of the available market with the goal of lending or leasing larger volumes and generating higher profits.

The scale and longevity attained by any specialized lender will be in direct correlation to how well they determine risk, price out their offers, and manage their outstanding portfolios across ever changing economic conditions.

Lender Portfolio Risk is a very important concept for business owners to understand.

“Business Financing Is A Point In Time Event”

Every active lender has an outstanding portfolio of loans/leases/mortgages/etc.  Each borrowing in that portfolio will have a risk rating of some sort, and the portfolio as a whole will have an average risk rating.

Lenders also have annual and quarterly lending targets to hit in order to cover costs and generate targeted profits.

Lending targets and portfolio risk ratings work hand in hand.

The presidents, VP’s, directors, and managers working for various lenders are graded against their targets and portfolio risk which in turn will drive their behavior.

For instance, if a lender is not hitting their targets, and the portfolio risk rating is low, they are more likely be more aggressive with approving and funding business financing applications.

On the other hand, if targets are being exceeded, and the portfolio risk rating is also low, then the lender may become very selective with respect to approvals issued as their may not be any monetary gain for the people in charge to take higher levels of risk.

At the other end of the spectrum, when risk levels are too high, lending is likely going to get cut back regardless of whether lending targets are getting hit or not.

This is a dynamic that plays out in the background with every debt financing company, every single month of the year.

This is why “Business Financing Is A Point In Time Event”.

The basic meaning hear is that when you apply for business financing it’s always about who can provide you with 1) the amount of capital you require, 2) for terms and pricing that are acceptable to you, 3) at the time you require it.

The impact of lending targets and portfolio risk ratings can have a significant impact on whether or not a given application will get approved.

I’ve personally seen this on several occasions where a certain size and type of deal will get approved by a particular lender and then 6 months later a very similar deal with a very similar borrower profile is declined by the same lending institution.

There’s nothing you can really do about this except to remember that business financing is a point in time event.  And when you’re looking for business capital, you need to figure out who can give you what you need when you need it.

Even if you have a long standing and fruitful relationship with a particular lending organization that’s always been able to meet your needs, there can be points in time when all of a sudden they can’t help you and you’ll be left to wonder why.

You may have just showed up at the wrong time.  And if that’s the case, its time to pivot and work on similar lender options because it may not be that you can’t get the financing you’re apply for, you just can’t get, right now, from your preferred lender.

There are times in the year that lending targets and portfolio risk ratings are more likely to come into play.  For instance, if a lender gets off to a slow start in the first quarter of a year, especially if the lender’s first quarter is the first quarter of the calendar year when overall economic activity can be slower, then there is a higher probability they are going to be more aggressive looking for deals in the second quarter.

Another example is the last quarter of a lender’s fiscal year.  Going into the last quarter, are the lending targets on track, or are they below the line?  You can get signals from the market place that lenders are being more aggressive putting money out, or they’re being very selective and pulling back, depending on their lending volumes at a particular point in time.

Just remember, that if you have a solid business financing request, someone likely has the funding for you … it just may not be who you expected.

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