Why Do Banks Say No to Business Startup Loans?
Why Do Banks Say No to Startup Loans?
It is very difficult for a new business to get a loan from a commercial bank or lender for business startup. New businesses are in fact the riskiest loans of any that a bank or lender might encounter. So understandably they are nervous about startup loans.
Why Business Startups are Risky
To understand why new business startups are risky for business lenders, take a look at the four C’s of Credit (collateral, capital, capacity, character).
- Capital- Business assets that can be used to create products or services and which can be turned into cash to make payments on business loans. A new business, especially a service business, has few business assets.
- Collateral – Cash to contribute to the business. A new business owner has little collateral unless he or she can use personal assets or has a co-signer with assets to pledge.
- Capacity – A track record to show that the business has the capacity to generate enough money to pay back the loan.
- Character. This is primarily a good credit rating. if you have a good credit rating (business credit or personal credit), though, it doesn’t mean you can get a business loan, but a poor rating will probably get payday loans Utah you turned away quickly.
Other Reasons Banks Deny Startup Loans
Lack of experience. In professional businesses, it’s common for banks to deny a startup loan to someone who doesn’t have at least a year of experience working in the profession.
Lack of management. In a similar way to the owner having no experience, lenders may not be comfortable with a brand new business that doesn’t have a strong, experienced management team to add their help to make the business go.
Lack of customer base. Yes, it’s one of those “Catch-22″ situations; you can’t get a loan unless you have customers, but you can’t start your business and get customers without the loan. If you can show that you have some strong customers lined up, that might make a good impression on the lender.
