The Washington Post recently reported that delinquencies for business loans are now down to 1.18%. In my opinion, this is truly incredible! Only 1% of businesses with loans from banks fail to make their loan payments on time. This means that you must convince your lender that you are 99% likely to make your loan payments.
Based on this data, it is no surprise that startups and early stage businesses have a nearly impossible time securing loans from banks. When you look at the data for small businesses, you will find that there is a significant percentage of businesses that will cease to exist in 5 years. Let’s say 25% of the small businesses with less than $1 million in annual sales will be out of business in 5 years. That means that banks are going to be incredibly unlikely to lend to these small businesses because they need to feel 99% confident that you will still be around in 5 years.
That rules out startups and early stage small businesses in technology industries like software, mobile computing, alternative energy etc because technology moves so incredibly fast that 5 years is a lifetime.
Unfortunately for small business owners banks can be selective. There are still plenty of credit-worthy, established businesses that will take loans. The banks don’t need to lend to small businesses in order to make a profit right now. In fact, the top 10 banks in the United States only approve approximately 10% of loan applications.
If you are a startup, what do you do?
I believe there are still some great options. There are 3 places I encourage you to look for a loan:
- Lendio – Matches you with lenders that best fit your needs and stage of business
- On Deck Capital – Unique way of lending to “Main Street” businesses. Lends even if your credit score is low
- Prosper – A peer-to-peer lender where you may be able to build up to a loan capacity of $25,000.
Of course these options will have higher interest rates than your traditional bank, but if you are able to utilize other funding sources during the early stages of your business, you may be able to reach a point in time where you can actually convince your local banker that you are 98.82% likely to pay them back, and pay them on time.
Have you been successful finding other sources of funding since the banks don’t lend? If so, leave us a comment, and share with other entrepreneurs who are looking to grow and expand.