Lending to Start-up Businesses

Starting your own business is tough. Whether launching the next big venture-backed start-up or a corner store in your neighborhood, running a company requires entrepreneurs to take risks and make sacrifices. Those sacrifices shouldn’t include giving up outside funding.

Yet more and more, small business owners are finding themselves coming up short when they look for funds to build their ideas into a reality. The average bank SBA loan, for instance, was $337,000 in 2012 – more appropriate for a well-established business with lots of employees than an entrepreneur looking to get his project off the ground. Small businesses looking for a more modest loan are out of luck, and normally end up waiting months to find out they’re declined.

For many banks, what it comes down to is that $75,000 loans just don’t generate enough interest revenue to make business sense.

Even given the tight credit environment, there are steps that start-up businesses can take to ensure they get funded. Alternative lenders are normally more open than banks to first-time business owners and entrepreneurs looking to get off the ground. At Endurance Lending Network, about half the loans we fund are to start-up businesses. So what does it take to get a start-up business loan?

At Endurance, all you need to know to get considered for a start-up loan is your personal and household financial information. We ask for people to disclose their net worth, credit score, and annual income, but don’t require the boatload of documentation banks ask for up front.

And what if you want to get start-up funding from a bank? The answer is, preparation is key:

1. Be sure to have all your documentation prepared before you go to apply for a loan. This means social security information, bank statements, tax returns, titles and proof of ownership of any hard assets (such as a home or car), investment accounts (401ks, IRAs…), and anything else you need to verify your net worth. Be sure to dot the i’s and cross the t’s – banks sometimes penalize borrowers who forget signatures or use pencil instead of pen.
2. Have a good business plan. Your idea should have concrete numbers behind it with well-illustrated assumptions about how you plan to get where you want and why that is a reasonable target. Your plan should build from the ground up (say, estimating revenue by projecting the number of customers you’ll have in a year) rather than from the top down. Needless to say, you should also make sure you’re coming out in the black.
3. Have prior experience in the field. It’s often easier for someone who’s worked in the restaurant business before to open up a restaurant than it is for someone who hasn’t. If you don’t have any experience in the field, do some research beforehand and see if you can get some in your own time.
4. Build up your credit score. A good credit score and credit history are key to getting your foot in the door with banks. Many banks won’t consider applicants with scores of less than 640 for SBA loans. You can build this score up by keeping your credit balance low, opening multiple credit lines and paying them off, keeping accounts open for long periods, and making all payments on time.
5. Be fast and transparent! A lot of good applications get stuck in the loan pipeline because borrowers are slow to respond. If you respond quickly and provide the best information you can, your chances are much better.

By following the above steps, entrepreneurs should be able to take some of the pain out of getting their businesses funded.

Let us know if you have any other tips we can pass along to small business owners at [email protected]!

Nik writes about small business and small business financing for Endurance Lending Network.

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