Question: Why Do Banks Say No to Startup Loans?
It is very difficult to get a loan from a commercial bank for business startup. New businesses lack two of the four C's of Credit (collateral, capital, capacity, character) that bankers want:
- Collateral - Cash to contribute to the business, and
- Capacity - A track record to show that the business has the capacity to generate enough money to pay back the loan.
Answer:
Typical Bank Responses to Startup Loan Requests:
- Just Because.
Banks will often say simply, "We don't give loans to startups."
- 100% Collateral.
One bank said it would give an $80,000 loan at 8% interest if the borrowers would have their co-signer put $80,000 in the bank (at 5% interest). When the borrower asked them why he shouldn't just take the $80,000 to start his business, they responded, "This way you get business credit." - Limiting Loan Amounts. Another bank would only give them $50,000, saying that was the limit for "SBA express loans for startups." (I don't know what SBA startup loan program they are talking about; there is no such program on the SBA website.).
- Equity from Owner
That same bank wanted a "required equity injection" (cash from owner) of $12,500. So the bank is really only loaning $37,500.
Personal Credit and Startup Loans
Banks often deny startup loan requests because the personal credit of the borrower has problems. For example:
- The problem may be as little as one negative rating on your credit report, but that may be all it takes for a bank to say no.
- Low credit ratings also effect ability to obtain startup funding. These days, any score under 800 is suspect, so you will need to know your credit rating and work to raise it.
Even with 90% guarantees from the SBA, these banks are not willing to lend to start-ups. The best thing you can do if you are denied bank funding is to go to other sources of funding or alternative lenders.
