Question

what risks do banks have whenever they give loans to small businesses?

Answer 1

Majority of banks will not lend money to small business. The risk for giving loans is more in the case of small business. The repayment of loans cannot be ensured thigh the profits earned by small business are very low.

PERSONAL LIABILKITY

The major risk banks faces while lending loans to small business groups is financial risks. In the case of sole proprietorship and partnership the personal liability of the owners will be comparatively high. The repayment risk is vested with the owners of the organization. Thus in the situation if any contingency they cannot make correct monthly or yearly payments to the banks.

INCORPORATIUON RISK

The risk associated with the situation of the company is another important issue that banks face. The banks will not provide stock offerings to the small businesses. In the case of large firms the righ5t to take managerial decisions are vested with few investors. Whereas here as the angel investors it is the responsibility of thee company to serve needs of thousands of individual owners. Thus sometimes the real owner will lose the control over the firm. It is another important reason why banks don’t lend money to small firms.

CREDIT SCORE RISK

Small firms usually takes loans from many sources. Thus the credit score of the firms will be very low. If the bank lend money to those firms with low credit score they looses their fund. Credit score issues is the type off risk associated with the banks.

INTREERST TRATE RISK

Small business will not have the capacity to face the shifts in interest rates. Small firms cannot cop up with the sudden fluctuations in interest rate. If there is sudden increase in interest rate small firms cannot make loan repayment due to low profits.

These are the main risk faced by the banks while providing funds to small firms.