Most small businesses cannot operate without a loan over the course of their operation. Moreover, none should ever operate with at least one insurance policy. While you take a risk every day with your business, your bank and insurance company do also. Lenders and insurers obtain as much information as they can to increase profit: risk ratios over the long term.
Determining the Risk
Banks and insurance companies are most concerned with losing their investment in a small business. Banks evaluate the ability of a business to remain solvent and not default on its loan. Their interests are linked to the bank's money which is on the line up-front. The insurance company outlook is how likely they are to have to cover expenses for accidents, client lawsuits, workman's compensation, and catastrophic disasters. The insurer's motivation is to remain solvent. They must accurately assess how much liability to assume so premiums always outpace claims. Loan officers try to assess and minimize their risks by analyzing credit history, potential collateral, character, and a business plan that specifies startup costs, where the money goes, and how you will repay it.
Established businesses must document cash flow. Considering their slightly altered perspective, insurance companies determine acceptable levels of risks by evaluating how long you have been in business, your location, revenue, type of industry, your insurance history, and your history of accidents, foreclosures, and defaults.
The Impact of Your Personal Life
You may not think the way you conduct your insurance policies and personal finances will affect your business. Banks and insurers do not see it the same way, especially when it comes to startup businesses. When banks do not have enough information about a business to assess their degree of risk, their only option is to look at your usual patterns. By looking at your personal life, they can determine trends. Banks need your social security number, an analysis of all of your assets, and spending habits. Assets and your net worth can be based on real estate properties, previous businesses, automobiles, and investments. Insurance companies are likely to ask for health records, driving records, and work history to determine the types of risks you take, how accident-prone you are, and how healthy you are. They may also want to know information about your bank loan because their interests may be directly tied to whether you default.
Looking at the Long Term
When banks and insurers consider investing in your small business or assuming your company's liability risks, they look long term. Both entities look at existing trends whereby so many small businesses fail. Long-term loans up to 20 years are only offered to small businesses with an established history and collateral. This isn't a unique position. Under the modern CECL model for credit cards, losses are looked at and planned for in terms of 1–30 years. Banks go as far as to become named beneficiaries on life insurance policies on company founders to ensure loan repayment. Loan covenants may require your financials to stay above a certain level. Long-term policies also apply to insurers who must underwrite these life insurance policies among a myriad of others like health, workman's compensation, and disability insurance.
Small businesses pose significant financial risks to banks and insurance companies, especially in the first five years. Loan officers and insurers seek to minimize their risks as much as possible by analyzing financial, personal, and long-term specifics and comparing them to historical trends before they can feel confident giving you a loan.