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Why Banks Deny Funding to Start-up Businesses

Updated on September 27, 2017
Shaun Avery profile image

Shaun has been a successful entrepreneur since 2010, electing to start his own business after his extensive studies in Business Management.

The nitty- gritty of why banks don't want to fund start-ups

If you're reading because you’re an entrepreneur or an aspiring entrepreneur, you've got to wonder why most banks deny funding to start-up businesses. Securing capital is vital to a business owner's ability to grow. Yet most small business owners cannot get funding at their bank and if you're a start-up, almost impossible. As an entrepreneur myself, this subject has baffled me. Why is it that banks basically cut off the lifeblood of any business- capital? Why is that exactly?

Well there are two main requirements that disqualify start-up businesses from receiving financing: showing profitable tax returns and putting up collateral that the bank can take in case the business defaults on the loan.

The problem with this is that most businesses have a lot of start-up costs at the creation of the business so it is nearly impossible to show a profit on your business tax returns. Also there are quite a few tax benefits to being a business owner which means most entrepreneurs take advantage of those benefits to limit their tax liability. But banks penalize businesses by denying them financing if they show too little in profits on paper.

And collateral with equity such as real estate takes time to accumulate and even if you do have it, why would an entrepreneur want to risk what took time to build up in the first place if there's a better way?

Before the recession business lending standards were not as stringent and during the recession many banks lost tons of money from businesses that did not pay their loans which then led to a large number of banks failing in a very short period of time. Then, of course, after the recession lending standards became so difficult that the majority of businesses could not qualify for financing, only the biggest and most powerful of companies could qualify.

Today not much has changed: banks still turn down the majority of businesses that request funding from their local bank.

This puts entrepreneurs in the predicament of needing capital but getting met with resistance from banks and lenders. The only remedy to this is creative financing "tricks" to overcome these funding obstacles, obstacles that keep entrepreneurs from successfully growing and creating services that can change the world for the better and improve our lives.

What I suggest and train on is to have a more creative business funding formula, this will cause the doors to open and entrepreneurs can secure hundreds of thousands in funding for a business even when they lack profitable tax returns and collateral. So the bottom line: if you're a start-up or don't have or desire using collateral, avoid the bank to secure funding, there are plenty of other options!

3 Tips to secure funding for start-ups and small businesses

Tip number 1: Don't try to secure funding on your own. There are professional agencies that have access to multiple lenders and some even provide you with a dedicated funding advisor to help you get the best funding available.

Tip number 2: Don't create multiple inquiries on your credit report by applying individually with banks. This can actually be a barrier to getting funding. Use a pre-approval process with an agency that doesn't obligate you or run your credit inquiries up.

Tip number 3: Have a specific use for the funding that you are sure will bring in revenue! This can prove invaluable to securing funding but also to the growth of your business.


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