Banks traditionally have provided loans for small businesses in need of capital investment for new equipment or purchasing real estate, for example. In exchange for financing, banks generally require significant collateral and usually only loan to companies at least a year old and have incoming revenue.
And banks generally are much more conservative with their investment dollars than angel investors which makes their potential to invest in startups more difficult as startups especially those which are high risk and unproven don’t have collateral, customers or a track record they can point to. Banks do not want to take equity risk in your company especially without getting upside that may come from being an equity owner.
For those businesses with collateral, bank financing may be more viable. Collateral may include:
Banks lending to small businesses generally want the same kind of answers that an angel investor will ask, and look for details from the business plan on how they will be paid back and how long it will take. A lender wants to know:
Currently, the federal government, looking to stimulate the national economy in face of the downturn, recently has provided incentives for banks to start backing small businesses again.
As part of the stimulus, the Small Business Administration (SBA) guaranteed $16.5 billion in loans to small businesses, as part of $325 million included in the Recovery Act in February 2009. Please review the Brain’s Guide to SBA Financing for more information on SBA Financing.