Why can't startup businesses easily get financing from banks?
Are you wondering why the banks reject the application of startup loans. If yes then this article has got you covered with the details. You will not agree more that it is very hard for small businesses to find commercial loans for the business startup. New businesses are not given loans because banks find it a risky venture. You might not agree that business starts off risky but there are certain things which lenders expect from the borrower and that is why it is considered a risky process. Let's dig into the factors .
Owning Assets for start up business loans
You need to keep in mind that banks expect a borrower to have a capital which the business assets that can be used for creating services or products. These are the assets which can later be converted into cash or making a repayment of loan. And sadly new businesses are already starting from scratch and that is why they do not own such assets. This is also possibly true for service based businesses as they are just starting out and you do not have much to offer apart from the services or manual labour. Moreover, banks find it hard to trust new startups because they are not able to have a track record. Banks expect a borrower to have a track record or the capacity which shows that their startup will be able to generate enough money. But sadly such a proof is not available for a person who is just starting out from the scratch.
Good credit for start up business loans
Lastly, a bank expects a borrower to own a good character which has to do with a good credit rating. If you have been paying your credit on time means then it will work in your favour because it is a prerequisite. Poor ratings will surely turn the banks much more quickly.
Further, the bank will not give you a loan if you lack experience. Banks have their trust issues and that is why they will deny start up business loans to someone who has not even had a year of experience in working professionally. Apart from the experience, the bank also sees that if borrowers own management skills, if you do not have an experienced management team to handle your finances then they will surely turn you down .
Lack of customer base
Another reason for which other businesses cannot easily get finance have to do with the lack of a customer base. This might seem illogical but you cannot get financed until you have a customer base. You might argue that customers based begin to expand once the business gets established and that's why you need start up business loans for. But contrary to his logic the bank expects and demands that you get creative and have a customer base in advance .
For all the above reasons mentioned it is hard to get start up business loans. But you can still try your best to craft a business plan carefully which could answer the question which banks might question or object to. You should have every plan of your business so that they can rely and trust on your startup.