Why Startups Have Such a Difficult Time Getting a Bank Loan

An article that we liked does a good job of laying out some basic aspects of the ever important credit profile that a lender uses to assess the risk of a potential borrower and why it is so difficult for a startup to find funding with a bank or more traditional lender.

The article discusses the “4 C’s of Credit”, which they us as collateral, capital, capacity and character. Obviously, there are nuances and different banks will have other data points they look at but this does form the basis of the important factors that a bank considers.

  • Collateral is needed for a loan and startups often have very little in the way of items to pledge to guarantee a loan
  • Capital assesses whether a company has the financial resources to operate and generate revenue to pay back a loan
  • Capacity takes a look at the track record of the company to measure of the ability of a company to pay all of its bills
  • Character is reflected in both the business owners credit score as well as other external sources of information

A bank is going to look at a startup and see a thin balance sheet (little collateral), low working capital balances and very little history, if any, of revenue generation. The founder(s) may or may not have good personal credit but a bank is unlikely to approve a loan based only on a personal guarantee.

Overcoming these obstacles can be tricky but you need to start with a solid, well thought out and well-presented business plan and be able to tell your story with the passion that led you to start the business in the first place. You will likely have more luck with an alternative lender or if you do have good credit, a personal loan that you can use to jump start the business and get some history and revenue generation under your belt.

About Payplant

Payplant provides growth financing for entrepreneurs, by entrepreneurs. Its Pay Me NowTM digital invoice-financing service provides cash to businesses when their customers pay too slowly. Payplant helps businesses with PO and Invoice Financing, Asset Based Lending, Term Loans and Customer Financing products. Payplant works with companies that don’t currently qualify for traditional bank financing, have grown too quickly for their current lender or are at the point in their evolution where an influx of working capital can elevate their business to achieve rapid growth. Payplant delivers fast and reliable funding, at very attractive rates and is completely on demand. For more information, visit www.payplant.com.