Banks Will Only Lend You Money When You Don’t Need It!

"A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” 

Consider the ideal scenario for the enthusiastic entrepreneur who wants to obtain a start-up loan and believes banks are there to loan money when it's needed.  They have the impression they can explain their reasons for doing the business, show a financial projection of how much money they expect to make, along with how much they need.  Then the banker will loan them the money, based on those projections. The new business assets and projections will be the collateral for the loan.  What is the problem with this scenario? 

First of all, loans must be completely collateralized by personal assets i.e. cash, stocks, real estate equity and any other semi-liquid assets that could be easily tapped to repay the loan if the business defaults.  However, if the entrepreneur had this type of personal collateral, they would not require a bank loan.

Banks loans are not an option for most businesses because of the "catch -22" scenerio where business collateral for a loan is required, yet most businesses don’t have any collateralized assets upon forming.  If money is required simply to finance salaries, rent and marketing, bank loans are not viable.

Where does that leave the entrepreneur?  If they have sufficient personal real estate equity, the direct approach is to pursue a line of credit at the bank for the amount needed.  They should avoid mentioning anything about a business start-up with the banker, which would only set off alarms, slow down the process and cost more money in the long run.  Past personal credit and debt reports will be required. These can be obtained through credit bureaus listed below:

• Equifax - 1-800-685-1111
• Experian  1-888-397-3742
• Transunion - 1-800-916-8800

Credit scores are based upon repayment histories.  It is wise to be cognizant of trends in economy when seeking a business loan or line of credit.  Other available resources for start-up businesses are venture capital, specialist seed investors, and business angels. For more help with understanding the best type of financing for your small business please contact us.