Top 5 Reasons Why Banks Avoid Giving Loans to Startups
The business of lending money at good interest rates is, frankly speaking, one of the most lucrative businesses on the planet. Lending does not only give banks the power to create new money, it generates massive revenue to the bankers.
Nevertheless, as much as banks love making money through lending, they are usually very skeptical about granting loans to startups. This short article examines the reasons for which banks are usually very skeptical about granting loans to startups:
1. High Risk
No matter how profitable a business may seem on paper, some associated risks will remain largely hidden until the business is executed. This makes startups highly risky ventures since some of the associated risk factors remain unforseen. So, banks generally would prefer to finance a running business than to finance startups.
2. No Cash Flow
Most times, the credit team of a bank takes loan decision based on the cash flow analysis of the business. Since a start up does not usually have a cash flow, it makes it very difficult for banks to make precise loan decision. Hence, most banks avoid lending money to startups to avoid any complication.
3. No Credit History
Perhaps one of the most important considerations in the lending business is the borrower's integrity. And a borrower's integrity cannot be bought, it has to be earned. Unfortunately, most startups don't have credit history which makes it impossible to ascertain the credit worthiness of the borrower. Consequently, banks are very skeptical about lending to startups.
4. Missing Financial Documents
Apart from the cash flow analysis, there are other documents which the credit team of a bank peruses before making a sound loan decision. One of such documents could be business registration certificate, purchase receipts or even tax clearance. Interestingly, it is very difficult for startups to get some of these crucial documents because it may not be issued to nonexisting businesses.
5. Competition
Lastly, banks are usually unwilling to finance startups because of the fierce competition that startups face from existing businesses that are intolerant towards opposition.
The established companies are known to be ruthless and hostile towards startups. The implication is that most startups have to struggle before breaking even. Who wants to finance a struggling business? Perhaps you are ready to do so. But trust me, the banks are not ready to do so.
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Yes, but, there are the "angel investors" and other "venture capital" businessmen specialized in startups. And with the actual low-interest environment (and risk-friendly capital markets, stock exchanges) in most developed countries, there is a lot of money for this. I participated in presentations of startuppers and they say: the money is no problem. The ideas, either. (Facebook wasn't an original idea either, wasn't the first social media.)
Investors like other factors like: devotion, aspiration, diligence, intelligence, realization, dedication... One of them said: We like more the startuppers who failed and went bankrupt twice already. They have more experience than newbies.
No doubts, venture capitals are willing to take greater risks with a large chunk of profit should the business succeed. Nice points here. Cheers!
Nice article my friend. However, it is true that one who money have the highest chance to get loan and one who is really needy, is devoid of all the help.
Posted via Steemleo
Hello dear @gandhibaba.
Banks are doomed to disappear.
It is the crypto market and DeFi who will dominate the financial scene of this decade.
It sounds contradictory that some entrepreneur wants to launch a new startup and turn to a traditional financial institution to find the ultimate financing, when there are so many options in the crypto market.
Crypto loans are a reality. With the configuration of smart contracts it is possible to achieve a participation by risking the minimum resources.
There are also cryptographic crowdfunding companies, where financiers place their assets in safekeeping funds and entrepreneurs must make periodic reports of the progress of their projects in order to continue opting for the rest of the financing capital. Thus, if the startup not seems to be in compliance with the established goals then the capital can be withdrawn on time with the minimum risk or loss.
Your friend, Juan.
Thanks for making these important observations and analysis. Indeed, cryptos are providing very good alternatives to the traditional banking environment and it is good for us. However, I do not see cryptos replacing banks any moment soon. Before that can happen, cryptos must have gained acceptance, even government backing, in most countries of the world. Until that happens, the banks are still forces to reckon with.