ABSTRACT

Lending money to anyone or buying any form of financial investment involves a degree of risk. Providing a loan facility to a sovereign government or a blue-chip company has some risk of default. Uncertainty of return rather than the absolute level of risk is the main reason why lending and investing in the small business market is seen as a specialised financial activity. All commercially based debt or equity investors will seek to reduce the incidence of adverse selection and moral hazard through a number of techniques which fall into the following four main groups: assessing applicant quality, terms and conditions, asking for security and a personal stake, and the price charged. All funding, debt, equity or asset-based, seeks to reduce uncertainty through the appraisal of finance applications. This may be done simply via a standard scorecard or through a much less transparent interview and discussion process.