What do you think? Generally speaking, is Canada risk adverse? Many of my recent blog entries have detailed different aspects of Canadian banks and lenders being adverse to any kind of default risk which may have served us well during the last downturn but today may be responsible for minimal economic growth within the small business market. I appreciate that the TSX has demonstrated that it can raise risk money for oil and gas but what about other industries? Is there a general sense of “no risk here please” in Canada?
What about as small businesses? Are they risk adverse? In my experience I would say that they are not given the financial situations I see everyday but that may be more a result of poor planning and not risk taking. So how do you know if you are taking a risk? Wikipedia defines risk as “Risk is the potential of losing something of value, weighed against the potential to gain something of value” (click here). In business this can be calculated using financial pro forma worksheets and business plans but ultimately someone still has to make the decision to take action – hence the risk.
When banks and lenders are making decisions about risk when they issue a Term Sheet or a Commitment Letter to a borrower. They hedge the risk by asking for lots of paperwork, getting a lawyer to make sure they are secured as well as other terms that give them the best probability of getting their money back. For mortgages and loans in particular, banks and lenders are looking to see how much their debt represents as a percentage of the total value of an asset or assets. They would not be interested in lending more than what an asset is worth so the question then becomes what percentage are they interested in? 65%? 90%? It all depends. Banks and lender use a series of variables and factors to determine this.
Before you go down the road of chatting with banks and lenders, get a handle on the risk your request presents and then take the time to figure out which banks and lenders will consider your request based on the risk.
“You can measure opportunity with the same yardstick that measures the risk involved. They go together.” – Earl Nightingale
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