Borrowing money from a bank to start your business is not an obvious option for prospective business owners. Unless you are well known, with a track record of starting and running successful businesses, no formal sources of capital are likely to invest in you in the early stages of your business 1. Banks usually require an operating history to reduce their risk.
“Banks love collateral. They swoon over profits. And they get positively dizzy over long-term performance records. Because of this, it’s difficult to get a loan from a bank to start a new business, which doesn’t have any collateral, profits or long-term success to back up your loan application” according to Master R Stell writing in NFIB.
What do you need to know when borrowing money from a bank to start your business
Banks demand a lot of info from prospective business owners before they will consider approving a loan.
- Collateral – your business has to have hard assets it can pledge to back up a business loan. Banks look very carefully at these assets to make sure they reduce the risk.
- Business plan – must show the banks how and where you’re going to make your money.
- All your personal financial detail – details on assets and liabilities such as your home, vehicles, investment accounts, credit card accounts, auto loans and mortgages.
- Insurance – banks may insist that applicants take out insurance against the deaths of one or more of the founders. And the fine print can direct the payout on death to go to the bank first, to pay off the loan.
Although there may be a lot of “red tape” evident when prospective business owners apply with a bank for start-up money, banks are at least making an effort to get involved. For example, some banks specialize in lending to small or new businesses. To decide whether a bank loan is right for your business, research both traditional loans and alternative funding sources. It’s also important to know your business inside and out.
Remember, you need a well researched and written Business Plan to get your business off to a good start!
- Getting Money for Your Business – Other Individual Investors
- Start your Business: Borrow Money from Friends and Relatives
- Using Personal Savings to Start Your Business
- Bootstrapping – starting a New Business with Your Own Money
1 Vinturella, J.B. and Erickson, S.M., 2003. Raising entrepreneurial capital, Academic Press.