Introduction
When it comes to financing or lending to businesses, assessing risk is crucial. In this video, we will discuss two strong indicators that a business is more likely to default on financing. We will also provide insights from a case study of 1800 funded deals compared against Secretary of State data. While these indicators are not definitive, they can be helpful in assessing risk and making informed decisions. Let’s dive in.
Indicator 1: Business Filed for One Year or Less Prior to Funding
The first indicator is the length of time a business has filed prior to funding the deal. According to the case study, businesses that have filed for one year or less have a higher delinquency rate of 24% compared to 14% for businesses that have filed for more than one year. This means that businesses that are relatively new are more likely to default on financing.
It’s important to note that businesses that filed after funding the deal had the lowest default rate of 13%. This suggests that businesses that have already secured funding are more likely to succeed and pay back their debts. However, this doesn’t mean that businesses that have filed for less than a year should be automatically disqualified from financing. Each business is different, and other factors should also be considered.
Indicator 2: Business’s Status with the Secretary of State
The second indicator is the business’s status with the Secretary of State. Negative statuses such as forfeited, delinquent, suspended, non-compliant, and voluntarily terminated have a higher default rate of 27% compared to positive statuses such as compliant, good standing, and active, which have a default rate of 13%. This means that businesses with negative statuses are more likely to default on financing.
Interestingly, businesses that had a null status performed better, possibly due to personal guarantees of the owner. This suggests that businesses that are not registered with the Secretary of State can still be a good investment, as long as the owner is willing to take personal responsibility for the debt.
Bonus: Businesses That Hadn’t Filed with the Secretary of State
In addition to the two indicators, the video also notes that businesses that hadn’t filed with the Secretary of State performed better, possibly due to the personal guarantee of the owner. This means that businesses that are not registered with the Secretary of State can still be a good investment, as long as the owner is willing to take personal responsibility for the debt.
It’s important to note that personal guarantees come with their own risks and should be carefully evaluated before making a decision. However, this bonus indicator provides another perspective on assessing risk and making informed decisions.
Conclusion
Assessing risk is crucial when providing financing or lending to businesses. The two indicators discussed in this video, as well as the bonus indicator, can be helpful in making informed decisions. However, it’s important to remember that each business is different and other factors should also be considered. These indicators are not definitive, but they can provide valuable insights into a business’s likelihood of defaulting on financing. By using these indicators, lenders and investors can make more informed decisions and reduce their risk.
