Why the Bank Won’t Lend You Money to Start Your Business
Banks are not in the risk business. They are in the lending money and getting paid interest business. A bank also wants to get its money back. So the type of loan a bank wants to make is one where they have no risk of losing their investment and will receive payments on time and with the interest.
Business startups are a risk. Most new businesses do not make it. Entrepreneurs sometimes think that a bank should be interested in their idea just because it is such a good idea, in their mind anyway. Because the bank does not like risk or startups, the bank is not all that interested in looking at your business plan and lending you money based on that plan. Many banks will charge you an application fee. A bank will generally only lend you money if you have security you can give them.
Security is the fancy name for something that they can take from you if you don’t give them back their money or pay them their interest. The most popular type of security for a new business is your personal home. If you have any equity in your house then if it is possible the bank will loan you money to start your business secured by your house. They would likely lend you money to do anything at all if you have equity in your house. So what is equity in your house? Equity is the difference between how much your house is worth and the amount of your mortgage. If you house is worth $250,000 and your mortgage is $110,000 then you have $140,000 worth of equity in your house. Based on this equity the bank will lend you money.
So what happens if your business does not work out and the bank wants its money? The worst case scenario is that the bank requires you to sell your house so that you can pay them back. This is why your spouse did not want you to use your home as security! Putting your house on the line requires you to be confident in your business idea.
An entrepreneur believes in their business and is willing to risk everything they own in order to make it a success. If you tell the bank that you are not interested in putting your house on the line for your business, it shows a lack of confidence in your business. Why should a bank lend you money, and take the risk, if you are not prepared to risk your own assets?
To summarize; a bank will lend a new business money if the owners of the new business have security. If no security, no loan.
Debi J. Peverill CA is an accountant with a sense of humour. She has written 11 books for business owners and is in demand as a speaker. Learn more business strategies at http://www.Peverill.ca