There is a common misconception that start-ups can’t get traditional bank loans. Not true. Banks, do, however, require some sort of collateral. So if you’re fresh out of college and your personal balance sheet is the title to a beat up 1998 Honda Civic and no significant credit history, than you have very little chance of squeezing any kind of money out of a bank. And in today’s market, forget it, financing is going to be tough to come by unless you have a stellar credit rating and something that the bank can use to offset the risk of the loan.
Even if you do have some assets you should still be realistic, don’t just expect a bank to fork over their cash unless you can prove to them that there is a high potential of generating enough revenue to repay that loan. If you can’t, you better be prepared for the bank to take something of value if you default. (p.s. hiding from a repo man sucks, so think long and hard before you get in deep with the banks). In this down economy, it’s become harder and harder for banks to lend out money. The Federal Reserve recently reported that 75 percent of domestic banks have tightened lending standards to small firms, and about 95 percent (up from 70 percent just a few months earlier) say they are charging more interest for loans to small businesses.
But there is some good news at the end of the dark tunnel. President Obama’s nominee of Karen Gordon Mills to lead the Small Business Administration is a positive step (btw – the SBA’s budget was cut in half over the past eight years of the Bush). Mills, a venture capitalist and successful entrepreneur from Maine has promised to take some aggressive strides to foster economic development and the growth of small businesses. Let’s all hope so.
“The small business sector in this country is the engine of economic growth, and we need to keep the engine running during this financial crisis. The best way to do that is through expedient, targeted and effective lending through the SBA.” Senator Chuck Schumer (D-N.Y.)
Time will tell whether the Obama administration is indeed going to be able to walk their talk. According to all early indicators though, bank/loan capital should start to become more available cheaper and easier than it has been in years. But with a credit crunchy market, this option still may prove to be just as challenging as the others. Is next year going to be the Year of Small Business Loan? Stay tuned.
Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital. In the coming weeks, we’ll be posting even more insightful nuggets from this paper. However, if you’d like to read & download all 33 pages of constructive prose right this moment, it’s sitting on our website: www.dontgosouth.com.