February 17, 2015
6 Kinds of Small Businesses That Donâ€™t Qualify for Bank Loans
Funding a new business is not something that most people can do on their own, and many turn to bank loans. For entrepreneurs, this can be the most difficult part about getting a new enterprise or business idea off the ground. Daniel Lieser, co-founder of TrustLeaf.com, a funding service that helps self-started businesses and entrepreneurs get starter loans from friends and family, shares the following six types of businesses that don’t qualify for most, if not all, bank loans.
1. Businesses That Are Too New
Early-stage entrepreneurs often waste valuable time looking for startup capital that they simply don’t qualify for yet. Banks usually look for businesses to be at least two years old before approving a loan, (especially for SBA loans).
What You Can Do:
For businesses less than a year old, most borrowing options require a personal guarantee from the business owner. Some of the best options for early-stage businesses are aimed at small businesses that already make revenue through a specific payments platform, such as PayPal’s Working Capital. Some online lenders like Kabbage are so flexible with their options that they don’t specify a certain number of months a business needs to be open. Kabbage also has a rather ingenious way to motivate the lenders who might have to fall back on using a personal loan: instead of using a stick, they use a carrot….or rather, a Karrot.
2. Cannabis Shops and Medical Marijuana Dispensaries
The difficulties of raising capital for cannabis startups is well documented (check out NPR’s Planet Money report), and the primary reason is as follows: banks are subject to federal regulation, and cannabis is still illegal on the federal level. Because of this, cannabis businesses can’t get loans. Most of the time they can’t even get a business checking account, which usually means that buyers have to pay in cash.
This has made it exceptionally difficult for budding entrepreneurs (pardon the pun) to compete against their better-funded rivals. While legalized cannabis is making some people rich, it’s not an easy kind of business to start unless you already have significant capital on-hand.
Even if the federal government decriminalizes cannabis, those who have non-violent drug offenses on their record may still be ineligible for the largest single source of small business bank loans, the Small Business Administration’s 7(a) loans program, which guarantees about $19.2 billion worth of loans.
Continue reading on the next page.