Many will tell you that it’s difficult to secure funding from a bank but I decided to do some research to find out how common it really is for early stage startups to get a loan. To my surprise (and maybe to yours), I found out that more startups were resorting to getting a bank loan during the first year than asking for money from friends and family.
A recent study conducted by the National Bureau of Economic Research (NBER) in 2010* found that debt financing was much more prevalent than recently predicted, even early stage companies, including pre-revenue firms, got twice as much of their capital from bank loans than from other funding channels. Some of the findings include:
· Debt was used five times more than equity
· On average 25% of the startup’s capital structure was in the form of a bank debt
· The average bank loan was approximately $48,000
The study also contradicted the popular myth that small-business owners pile on credit-card debt to fund their startup. Only 25% of entrepreneurs in the survey used their personal credit cards to finance their new ventures.
So what am I trying to say? Essentially that securing a bank loan may not be for every entrepreneur but it is a viable option to explore after running out of friends-and-family investments. Prepare yourself before you meet with a bank representative to apply. Make sure that your credit is strong and you have professional references to vouch for your credibility and business acumen. Polish the financials in your business plan and gather the necessary documents (tax, legal, incorporation etc.). For detailed information about the process of acquiring a business bank loan, check out this handy SCORE article.
*NBER,“The Capital Structure Decisions of New Firms,” studied the capital structure choices that firms made in their initial year of operation, using restricted-access data from the Kauffman Firm.