A small business start-up loan is a financial channel offered to companies that are not yet established, but are in need of financing. A small business start-up loan is typically not offered by large banks or lending institutions. The reason for this is simply that such loans are deemed too risky; since a small business start-up is not an established company it has no proven source of income.
When a source of income is not realized, the company has a greater chance of defaulting. That being said, some small business start-up loans are offered by banks. The small company needs to essentially prove themselves in these scenarios. They must offer a sound business plan and a credit rating that proves their willingness and ability to pay off debts. A small business start-up loan is similar to a personal loan–it is a channel of capital offered to an entity for a specified period of time and with a specified interest rate.
As a result of the skepticism associated with such loans, and the probability of a default, a lending institution will qualify the small business start-up. If the business is too much of a risk-if it fails in gathering enough income to pay off the loan or possesses a meager credit history-the bank or lending institution will not offer them a small business start-up loan.
Since a start-up business does not possess the established intangibles of a regular company, the qualification process that goes into awarding a start-up business loan is crucial. Additionally, the process is stringent because the vast majority of start-up businesses fail within the first few years of initiation.
The prospect of receiving a loan from a bank is only awarded to companies that have sound business plans, an enormous amount of capital, or who possess perfect credit ratings. Even if such specifics are met, business start-up loans offered by banks will be attached with a very high interest rate. As a result of a bank’s unwillingness to finance start-up businesses, the majority of business start-up loans are offered by family and friends of the entrepreneur.