Start-up Entrepreneur: A High Financing Risk for Lending Institutions – Seeking other sources of debt and equity financing to finance a new business may entail more than just your winning business concept and power of persuasion. Why? Because start-ups are considered high-risk investments. Though, there are some investors such as venture capital firms who are willing to take the risk, if they can see that your line of business or product will yield high returns of their investment in the future.
When you establish first time credit or have already a tract record, you can already borrow from the bank. This is the time financing institutions will enter the whole financing set-up.
Lending institutions from commercial banks to rural banks all operate from the same procedure. They only differ in interest rate and risk management. Big bank won’t lend you so much money if they see you as a very risky client. And though, smaller banks may take more risks, they charge higher interest.
Microentrepreneurs who may be considered unbankable can turn to those rural and thrift banks as well as to semi-formal lending institutions and cooperatives. While the interest rates are higher, it only involves a small loan amount and the microlenders typically monitor how the loan is being utilized and how the borrower’s livelihood is improving.
For established businesses, borrowing from commercial banks is the best financing options since they have lower interest rates. But you need to have collateral and financial statements ready in taking a business loan.
If you pursue in getting financing from commercial banks, just make it sure that you will not use other assets of your business as collateral. It’s risky if you do that, for it will paralyze your business when you defaulted your business loan and lending bank foreclosed your assets.
Source: Entrepreneur magazine