Why Would a Bank Refuse a Startup Loan?
If an entrepreneur has faced a crushing rejection from a bank regarding start-up loans, they shouldn’t lose heart. it’s actually quite difficult to get loans from commercial banks for business purposes. Startups and new ventures are among the highest of risks a bank can take with loans.
In order to mitigate this risk, the lender back wants the borrower to fulfill several factors. The main four of these are called the 4 C’s of Credit. This involves Character, Capacity, Capital, and Collateral. We’ll be talking about these C’s in more detail below:
Character—This is simply a positive credit rating. A good result here wouldn’t guarantee a loan approval, but a poor one is almost sure to get you disqualified from the process.
Capacity—This is a history of the business’s ability to generate the required profit and/or revenue in order to pay their creditors back.
Capital—These are the assets a business owns that can be of use. The products they make or the services they provide could generate money, which could pay business loans if all else fails.
Collateral—This is the cash a business owner has to invest in his own venture. These could mean either their own personal belongings/savings or a co-signer with the required assets.
Even after everything seems to be on the side of a new business, banks could still come up with any reason to refuse a loan. It’s worth looking at a few responses from banks to some young folks looking to begin a business venture. along with this, it’s good to know what your next step should be when faced with such responses:
- If a bank simply says that it’s not their policy to give startup loans, move ahead. There are plenty of other options. In the first place, try contacting banks that have been known to give loans to new businesses in the past.
- A bank may say they would give some cash if the borrower puts the same amount of cash as a deposit with them. They would try to convince you by saying that you get business credit in this manner. However, you cannot have that unless the business actually gets off the ground. Again, in such a case, move on to other options.
- Banks could try to limit the loan to a ridiculously small amount, saying that it’s the limit they’re allowed to give by SBA laws. A way around this is to get all the information from the SBA itself. SBA loans require more paperwork and effort, which is why banks could try to simply not bother with them. You may even b e able to get SBA loan approval beforehand so the bank can’t object on that count.
- The bank may require some equity from the entrepreneur, which would severely cut down on the amount actually loaned. For instance, if you put down a $20,000 deposit and the bank loans you $100,000, you actually only get $80,000. However, you would have to pay back the full amount with interest, so the bank is benefiting at your expense. Your response here could be to offer some other idea where banks can get their assurance and you won’t have to part with any of your own money. One way around this is to suggest a cosigner. If a cosigner has more assets than you, they would be a safer bet for the bank. However, they would also be putting themselves at risk for the sake of your business.
The Personal Credit Issue:
Banks could deny a loan based on the personal credit history of an entrepreneur. A new business wouldn’t have had time to create a credit history. Even a single negative rating can result in a loan getting refused. the score should ideally be above 800. Hence, any entrepreneur in search of loans should be aware of their own credit rating and strive to increase it.