Getting startup business loans in the US and Canada is a tricky business.
Most banks are conservative about business loans, and the startup failure rate is through the roof, especially in 2020.
If we set out to explore all the ways you can raise capital for your business, we can have a field day scribbling down the plethora of options you can find on the Internet.
Despite all the available options, what guarantee do you have that these sources will give you a loan?
Former host of CBC’s Dragons’ Den Diane Buckner says,
“Banks aren’t supposed to be giving away money…it’s mostly true that only if you can prove you don’t need the money will they give it to you.”
That’s absurd. Why would you go to a bank for a loan if you didn’t need it?
The good news is that banks are not the only places where you can get a startup loan for new businesses.
The ultimate key to a profitable business strategy is never to put all your eggs in one basket, especially when it comes to financing your startup. Diversified financing will allow you to cope better in the face of downturns and improve your chances of making it.
90% of startup businesses fail. If you do financing right, your startup business could be part of that elusive 10%.
We have already established that banks are not very willing to grant loans for your startup business funding.
And this is why you should seek alternative lenders willing to grant a business loan for startups.
From business incubators to government grants and angel investors, each of these sources has its criteria to evaluate if your business is authorized for startup business loans.
What is a Business Loan?
A business loan is a money borrowed from a bank or a money lending organization to raise capital for a startup.
Some businesses take out loans to cover the salaries and wages of their staff until the company takes off. Other companies use the business bank loan to buy office supplies, inventory, or projects.
However, you wish to invest that money into your business, you will have to inform the lender about your spending plans. The lender will demand a clear outline of your expenditures because bankers are not in the risk business.
Let’s give you a little insight as to what banks look for when considering your loan request.
How to Get Approved for a Bank Business Loan?
According to David Bangs in Entrepreneur, professionalism is the key to getting your loan application approved.
Further expanding on his advice, here are the six C’s of credit that will increase your chances of getting a bank business loan.
Personal character reveals a lot about your credibility as a borrower.
All loans given to small businesses are personal loans, so your history with the bank largely determines whether or not you get a startup business loan.
The bank will also consider your personal and business credit histories while reviewing your application for the loan.
This refers to your business’s capacity to support the debt load.
The debt to net worth ratio mainly plays into reaching a credit decision.
A business with a high debt to net worth ratio is less deserving of bank credit than a comparatively low stakes business.
The economy plays a crucial role in whether or not a bank approves funding for small business startups.
This happens because the economy also decidedly determines the startup failure rate.
If a recession is on the horizon, even the best application, a squeaky clean credit history, would still give you zero guarantees if or not you would get approval for a startup business loan.
Collateral is equally as crucial to a bank as your credit history because it’s a loan repayment source.
The bank will want loan repayments from your operating profits and inventory. This will improve your status as a borrower and depositor.
However, if things go south, the bank can always go for what you had put up as collateral when you applied for the loan.
It makes banks feel safer.
A business loan is all about credibility.
That’s what the bank tries to assess, and that’s precisely what you need to determine when you apply for a business loan. Are you sure your startup business will hold up?
How credible is your business plan? Are you starting a business on a whim, or have thoroughly researched your plan?
When you have a solid, well-researched business plan, answering the bank’s questions about your credibility as a borrower becomes a lot easier.
A financier will always inquire about a contingency plan when considering your startup business loan application.
Bankers are realistic. Moreover, they are not riding the same high as you are of starting a new business and dreaming of its success in the future.
They review loan applications every day, and unless you manage to impress them, you’re out of luck.
Having a contingency plan indicates perspicacity. The banker will take you more seriously, and it will help you explore your options if your business plan fails.
Now, let’s discuss the sources to get a startup business loan in the USA and Canada.
7 Ways You Can Get a Startup Business Loan in the USA and Canada
Here are seven sources via which you can take out small business loans:
If you are starting a business, the very first investor should be yourself. You either have enough cash on hand to start a business or enough liquid assets to raise the capital for your business.
This way, even if you take out a loan later, the bank or any other lender will know that you have a long-term commitment to your business and are willing to take risks.
This is the money that your friends, spouse, parents, or sibling lends you to start a business. Most investors and bankers refer to this money as patient capital.
This means that the money you borrowed will be paid in time when your business is making enough to generate profits.
Venture capitalists love tech-driven startups that will have excellent growth potential. So, if you’re not one, they might not even look your way.
As an entrepreneur, you should know those venture capitalists are highly invested in fields such as IT, communications, and biotechnology.
If you get a venture capitalist to invest in your business, they will want an equity position and give your company more room to take risks and go for higher-risk projects.
Venture capitalists demand excellent returns on their investment, which usually happens when a company issues an initial public offering (IPO) – meaning when shares are open to the public.
Angel investors are wealthy individuals or retired company execs looking to invest in small businesses owned by others.
As the name goes, these investors are a real asset to a business. They not only lend you their money, but they are often pioneers in their fields and have valuable advice, a network of contacts, and management knowledge to share.
In exchange, they want control of your company’s management practices. In other words, they want a seat on the board of directors.
Angel investors do not usually keep a high profile, like venture capitalists.
Similar to venture capitalists, business incubators focus on high-tech business by funding small business startups.
However, various incubators will focus on job creation, revitalization, and the sharing of services.
Incubators initiate help by themselves.
They invite high potential businesses and provide them their premises and administrative, logistical, and technical resources so a startup can take off without the added costs of management weighing it down.
Generally, the incubation period lasts somewhere around two years. Most businesses that receive this sort of help usually operate in the IT, biotech, multimedia, and industrial tech sectors.
Hit this list for a full list of business incubators all across the US and Canada.
Governments also give out loans for businesses. If there’s a government scheme to support startups, you can also get a collateral-free loan.
However, getting a grant from the government can be a complicated process. There is plenty of competition, and their criteria are very tough.
If you apply for a government grant, you will have to provide
- a detailed project description
- an explanation for the benefits of your business
- full expenditure plan
- personal, relevant experience
- background on key members and associates involved in the project
- a completed application form
When it comes to getting approved for government grants, here are some problem areas where candidates often fail:
- incomplete or irrelevant research
- legally ineligible geographic location
- poor communication of ideas
- lack of strong rationale
- unfocused business plan
- unrealistic expectations
Bank loans are the most common source of startup business loans.
Banks mostly provide funds for small or medium scale businesses. Since every bank offers a different set of advantages, check with different banks before finding one that fits your business needs.
Some banks have a comparatively, more aggressive repayment strategy than others. So, it would help if you shopped around before you settle with a bank.
We already know that banks are always looking to play it safe. They want to give loans to companies that promise a better chance of repayment and have excellent credit.
Whichever of the above methods you try, you will not get a loan unless you have a sound business plan to back up your application.
Why Is It Difficult to Find Startup Business Loans?
If you think it’s only you who is having a hard time getting a startup business loan, you’re wrong.
According to an article published in the US News, lenders don’t want to work with startups.
Instead, they’d give company to an already up and running business than to one that’s just starting. Why?
It’s simple. Startups are high risk, and as we discussed earlier, 90% of them fail.
So, banks mostly want to steer clear of a risky investment. If they think your chances of failure are more than those of success, they won’t touch your business even with a 10-feet pole.
According to a report published in the US Small Business Administration bulletin in 2018, more than one-fifth of startups failed to survive the first year of operation from 2005 to 2017.
According to an article published in Forbes in 2019, the startup failure rate hiked up in 2001. The article also foreshadows that 2020 might be a lot like in 2001.
As it turns out – with the coronavirus and the looming recession – Forbes wasn’t very far off.
Most lenders prefer businesses to be of a certain age or have a certain amount of profit. Both these conditions automatically disqualify startups from the loan rate.
However, that does not mean all business owners will have a tough time getting a loan. It all depends on the business plan. And if you combine the business plan, your credit history, and collateral altogether, they determine if your startup is creditworthy.
For most businesses, getting startup business loans can be a complicated process, if not impossible.
However, if you follow a specific set of rules, prepare a contingency plan, a solid business plan, keep your expectations realistic, and prepare in advance for setbacks, you will make an attractive candidate for a bank loan.
Still, if the bank does not approve of your loan application, there are other sources through which you can acquire a loan for your startup business.
Your startup’s eventual success and your chances of getting a loan both ultimately depend on your business plan’s credibility.