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January 08, 2020
The short answer is yes.
Approximately 80-90% of startups fail, so banks take on higher-than-average risk when they lend to new companies. To manage that risk, the bar for loan approval is often higher than it might be for established companies. Also, banks usually require startups to secure loans guaranteed by the Small Business Administration, whose lending guidelines tend to weed out candidates who might have a high risk of defaulting.
So yes, banks do make loans to startups – provided they demonstrate the ability to repay them. Generally, that means:
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Strong collateral. Lenders expect borrowers to put up something – usually their home or other significant asset. Collateral helps demonstrate that borrowers have “skin in the game” and will not walk away should their business go south.
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How much collateral is needed? The chances for loan approval are highest when the collateral at least matches the loan amount. The lower the collateral, the lower the chances of approval.
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At least two months of cash reserves. History is filled with startups that obtained a loan and put the required 10-20% down only to find themselves cash-poor and unable to make regular payments. That’s why it’s essential to have a cushion.
The SBA and its partner banks want to see enough money in your accounts to cover loan payments for at least two months. And they will expect to see these funds on your bank statements two months before you apply for the loan.
An experienced SBA lender can share more tips like these to help improve your chances of financing success. So plan ahead – and seek advice from your banker.
Also See:
What should I do before applying for a loan?
Estimating start-up costs
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