Monthly Financial Analysis for Business Owners Menu

The Business Ferret for Business Lenders

If your institution offers lines of credit to businesses of any size, you are always at risk of losing millions loaned to businesses that should not have been borrowing in the first place. Due diligence comes into play with standard financial evaluations but, most of the time, this isn’t enough to see the whole financial picture.

Cost of Capital

We are all concerned with the lowering the cost of capital. In theory, if someone could obtain capital for free they would take as much as possible, and not use their own cash or capital at all. Of course, that is not the world we live in. There is a cost to capital – both borrowed through interest expense and equity capital.

Research shows that, to remain viable, equity in a privately-held business should at least be earning a 26.5% annual return – after tax! Many privately-held businesses earn a 7% or less average annual return on equity – less than the average annual borrowing rate. So if the equity capital has an implied after-tax 26.5% annual required return and borrowed capital has an interest rate (currently) of 7% annually – then which type of capital would you want to use more of? The borrowed money of course, but no bank would lend the total amount of capital for a business. Even if they did they would have to charge more and more to offset the increasing risk of owning a business.

Decrease your risk

What if there was a way to close the gap between what your institution was comfortable lending and what the company would need to borrow to promote safe, sustained growth? What if you could more accurately predict the financial risk of potential lenders and adjust your rates to attract the best business borrowers?

By using the Business Ferret to determine a company’s overall financial health, you can more accurately predict risk and attract a better portfolio of business borrowers. Your healthiest clients will benefit from much more attractive rates and the dogs, well, they can get the scraps. Improve the health of your of your investments by getting the complete picture of business financial health.