How to Avoid Being a High Risk Investment

Posted by on April 29, 2014 in Business Start Up Advice [ 0 Comments ]

How to Avoid Being a High Risk InvestmentWhen a bank is deciding whether or not to loan money to a new business, they first assess the risk of the investment.  A risky investment is often determined by a criterion that changes in times of economic down, or upturns. Unfortunately, just being a “new” business, or a “nontraditional” business makes you “risky.”

If you fall under one of these definitions, the bank might deny your loan, but you can often qualify for a cash advance or merchant business loan. Companies that offer these loans believe in businesses that are often snubbed, and allow for a more equal playing field for varieties of businesses, truly allowing for the free-market system to do its duty. However, it is good to know what makes a business high risk, or extremely high risk, so that you can avoid being so.

Related: Find the best merchant cash advance company for your business. 

Things to keep in mind during the investment process:

  1.        A borrower may not have a debt-to-income ratio of more than 43% (Tweet This)
  2.        Fees and points may not exceed 3% of loan amount
  3.        Lenders must verify a borrower’s income

Related: 5 Reasons Your Business Loan Wasn’t Approved

If at any point in the business cycle you catch yourself falling into the “high” risk zone, you should realize that these risks often times lead to  profit losses. Profit losses are the beginning to revenue losses, which will shut down the company. To avoid this you need to make sure that your business isn’t entering the “red zone.” Some companies grow so fast, over equip, and overestimate the trend’s likelihood to continue. When it doesn’t, they lose money and aren’t able to make up for the losses, leading them into a downward spiral.

Think Ahead:

  1. By planning ahead and being practical in the possibilities of your business at that particular time you are less likely to enter the risky zone of investment options.
  2. Spend wisely. If you’re a new company don’t spend your money on ridiculous swag. Wait, save the money, work hard, and you will get where you want to be.
  3. Don’t expand too quickly. It’s hard to wait when you get the growing pains, but waiting until you’re completely ready is important for full low-risk growth.
  4. Be willing to put your own assets up for collateral. If the bank sees that you’re not willing to take a risk, they might not be either.

By being intentional with your planning and realistic with your expectations, you can prevent a lot of the risk factors that will keep the bank from backing you. However, remember that the bank is not your only option. There are a lot of companies willing to give new businesses loans, if you’re willing to do the research to find a reputable, reliable one.

Related: 4 Smart Ways to Allocate Funds for Your Business

There is also the Small Business administration’s loan and grant search tool to help you find government backed financial options. Remember, your options are only as limited as your resourcefulness, and that same resourcefulness will help you make wise financial decisions, making you a less risky investment in the future.

Author Bio: Jonathan Morris is a financial planner, writer and advisor. He has worked with a lot of small businesses in their growth process, and advises about business finances, strategies, and obtaining necessary loans and merchant cash advances.

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