The process of getting a start-up loan can feel a lot like trying to climb Mt. Everest. Without any gear. There are blizzards of forms to file and what feels like a million hoops to jump through. And the worst part is that it generally takes forever to hear back at all. And an even longer period of time to actually get the money you were seeking!
Let’s shine some light on the process to dispel some of the myth and mystery. Here are some key factors the lender you’re sitting across from won’t tell you.
The Paperwork Nightmare Is Intentional
Yes, you read that correctly. In today’s mostly digital world, most of those forms (along with the other hoops to jump through) aren’t really necessary. If they’re not necessary, you might be wondering why they are in place. The answer is simple: to discourage you from getting a loan.
Banks make money by lending at interest, so why would they want to discourage people from getting loans? It’s true, banks love lending money. They just don’t like lending money to YOU.
You, the risk-taking entrepreneur. You, the relatively unknown quantity. You, the individual with a somewhat limited ability to repay the loan. When they lend, they’d much rather make loans to big, institutional concerns with a history that spans decades. But, you’ll never hear bankers admit to that.
Most Of The Decisions Aren’t In Human Hands
Banks have formulas and algorithms that inform them whether or not a loan is a safe bet. The computer either returns a one or a zero. A yes or a no.
If it’s a yes, you’re probably going to get your money. If it’s a no, your chances of changing a lender’s mind are essentially zero. You either meet their criteria, or you don’t. If you don’t, all the amendments, letters from friends and families and any other enclosures you provide with the mountains of paperwork they require won’t make any difference at all. You may as well save time and not even include them.
Your Personal Credit Score Matters – A Lot
Yes, your company is a separate entity. But, because it has no history when you’re first starting out, the banks are going to look to you to be responsible for the loan in the event your company can’t pay. That means they’re going to be looking closely at your personal credit score.
If your score is south of 720, your chances of getting a loan fall to almost zero. If you manage to get one, it will be at unattractive terms.
The lesson here is that before you launch and try to fund your business, get your financial house in order. This will enable you to better weather the financial hardships that are bound to be a part of any new business venture in its early days. And, you will increase your chances of actually getting a loan in the first place.
Be Prepared To Offer Collateral
Most banks are willing to lend up to $10,000 with no collateral. But, almost every business is going to need more than this to make a proper start. If you’re looking for more, be prepared to offer up some of your property as collateral for the loan. Be aware of exactly what that means. Whatever property you offer up (car, house, boat, etc.) as collateral can be taken by the bank if you fail to pay. It’s not pretty, but those are the rules of the game if you’re dealing with a bank.
Banks Aren’t The Only Game In Town
The Loan Officer’s job is to make money for the bank. Even if they reject your application, the bank you’re talking to has no obligation. Therefore, it is unlikely to tell you where else you might look for funding for your business idea.
The good news is that there are actually tons of great options and all of them can be researched online with ease. If you’re looking to expand your options, consider online resources like Lending Club where you can get “crowd-funded” loans. And some other crowdfunding sites for entrepreneurs such as Funded.com. Also, many private lenders offer different types of loan programs and alternatives to traditional bank loans.
The bottom line is that while banks used to have a near-monopoly on the funding of new ventures, those days are long gone. If you get a little creative, you can open the door to whole worlds of funding possibilities.