August 1, 2024 - 3 Min Read
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The reason startup businesses have difficulty getting financing from banks is because they are considered risky. Banks make money by investing it. They want safe investments. They have entire departments who analyze the risk on different investments they carry-out. One of the easiest ways to invest money and make a good return is loans. However, if you are lending money to people who can’t return your money then you’ll end up losing a lot of money, and eventually going out of business yourself. To avoid these risks, most national banks do not lend to startups without 2 years of tax returns. Those two years of tax returns or historically cash-flow can let a bank know whether or not your business is a good investment.
Businesses under 2 years in operation or without 2 years of financials are less likely to pay back a loan than an established business. Let’s look at all the reasons why.
Failure Rate: 50% of startups fail within the first 5 years. Most SBA loans are 10 years long, if every startup was approved for a loan, literally half of businesses would not be able to pay them back by the halfway mark. Finding your niche, creating a product offering, creating a website, finding customers, and then consistently selling your products and services sound easy, but it’s not. Your journey will always have unforeseen obstacles, forks in the road, paths you must avoid, new strategies you must be equipped to make and analyze. Most likely your destination will be further than you expected, and you may run out of resources along the way. All of this comes with starting a new business. Although many will succeed, most people are not going to be equipped for this.
Proven Model: Unless you’re purchasing a franchise, or opening up an additional location, your startup business does not have a proven model. When you are beginning an independent startup, you literally have to test out everything. You have to test whether or not you have a product or service that people want. You have to figure out who wants it. You have to figure out how much you are going to sell it for. You have to figure out which services and products you need for your business to help day-to-day operations. You have to hire employees and train them. You need systems in order to scale operations. As a brand-new business figuring all of this out, odds are stacked against you that you will get it right.
However, if you gain experience by working with someone who is already doing what you want to do, you can increase your chances of success.
And then you can get an SBA loan from a non-profit organization that cares about helping people, and giving those who have higher risk a chance. These institutions are called Community Development Financial Institutions (CDFIs). These CDFIs will most certainly give you a loan to start your brand-new business but you must still be able to show proof of concept. That is your business plan and financial projections need to be able to make them believe your startup concept is strong, and worth the risk.
We have 25 lenders that we work with across the country. We know which ones like your industry, and what they need to see from you to be approved.
To discuss your specific situation and how much you can be approved for in an SBA working capital loan for your business, request your free consult below.
If you need more startup loan help, make sure you check out these articles:
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