Why Banks are Passing on Startup Loan Requests

Very few entrepreneurs can successfully launch a company without acquiring a loan at some point or another. Maintaining a growth trajectory while navigating the hot and cold sales climate is something that all businesses go through. While some companies can come out each quarter in the green or at least the black, it’s common practice for newer businesses to find themselves consistently in the red. It’s for this reason that bank startup loans are becoming more difficult to come across for new entrepreneurs, and why many are turning to short term business loans from online providers who offer more leniency and a higher approval rate.

Potential investors are reluctant to approve startup loan requests when they suspect that the company seeking the loan isn’t, or at least won’t be, profitable in the future. In fact, loans for new businesses are the riskiest loans for a bank to give out and understandably so. According to the U.S. Bureau of Labor Statistics, only half of new businesses manage to sustain themselves for 5 or more years. Worse than that, a mere one-third of them can stay in business for over 10 years. Although numerous variables play a major part in those numbers, banks play the percentages when determining when and who to give loans to.

Some of the credentials banks and other lenders look for in a borrower include:

  • Capital

This can be problematic for businesses looking for bank startup loans since capital is typically what they’re lacking initially. Essentially, lenders expect borrowers to have at least enough capital to maintain their operations. They also take into consideration how much debt and equity a business has.

  • Collateral

While this can be an easier option for borrowers to present to lenders, the drawback to using collateral for bank startup loans is that collateral can come in the form of business and/or personal assets or that of a co-signer’s assets. It’s one thing to invest time, money and energy into launching a company and working to make it a self-sustaining, profitable enterprise; it’s another however, to risk losing your home, personal savings, retirement and other assets in the process.

  • Capacity

This is where things can get tricky. Lenders want to see that a company can generate enough revenue to pay back the initial loan. Entrepreneurs or “wantrepreneurs” may find it challenging to display a startup’s ability to gain and maintain sales when they have no track record to back it up. A well-designed business plan, extensive market research and an ability to demonstrate a demand for the company’s product or service, as well as how it may stand out from competitors helps. Unfortunately, this is usually a road block for businesses in need of funding before they have any sales statements to report.

  • Character

Banks are doing more than investing in the startup, they’re also investing in the owner. A prospective entrepreneur that can present a great credit score, a fundamental knowledge of the marketing arena they’re entering, sound recommendations from solid references and a less than flaky job history will go far in the eyes of the banker who is considering the loan for approval.

While it may be difficult to acquire a bank startup loan, it’s not impossible if you turn to smaller lenders online. Fast & Easy Funds is an online business loan lender that offers select funding options like cash advances, easy term loans, and asset-based lending. No matter what your circumstance is, Fast & Easy Funds understands that startup companies and small, local businesses need the necessary funds to get started.