Start Up Financing For Businesses

One of the most difficult loan requests we receive are those for Start Up Financing. What makes these loans so unique is that they are all projection based. Normally the start up incorporates new ideas and practices that are not yet proven. In addition, lenders know that odds are against a new start up business succeeding. For this reason start up loan requests need to be really strong in the following areas.

Industry Experience: Since there is not historical performance for the new business, entrepreneurs must have direct industry experience that proves their competency to run the new business. This is normally demonstrated through a management resume. If the owner does not have direct industry experience a key manager will need to be in place. At times a lender will accept a strong employment contract to support this need. The best scenario is for the key owners of the start up business to have at least 3 years related industry experience.

Liquidity: I’m sure you have heard the saying that “Cash is King.” It really is true with a start up business. 30% of start up business expenses will need to come from the business owners pocket. In addition, lenders like to see 6 months of working capital cash on hand outside of the loan request. The more cash a borrower has, the stronger the loan request becomes. This is also true with the amount of equity or “skin” in the game a lender has.

Collateral: The last ingredient needed to obtain Start Up Financing is collateral. Lenders like to have their loans 100% collateralized. This 100% collateral is after the lender discounts your assets. Lenders tend to like real estate and will give you 75% of the value as collateral (less any mortgages). Equipment normally is given a collateral value of 50% of what is listed on the books.

If you have these key ingredients you may be in the market for Start Up Financing. If you are strong in two of the three areas you are still in the running for the loan. If you are only strong in one category, or weak in all categories, it will be very difficult to get your loan approved.

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