Why The Bank Won’t Finance Your Business Plan

Over the years I’ve received hundreds of emails from entrepreneurs complaining about banks not lending them money on their business plans. I just got another one this morning, and when I searched this blog I couldn’t find a post to cite as an answer. So here it is, today:

Banks can’t lend you money on your business plan. It’s against the law. They’re supposed to protect their depositors’ money by demanding collateral, credit history, and low risk. And startups are high risk.

Bankers are good and bad, smart and not-so-smart, liberal and conservative. Sure, some just follow rules and fill forms; but I’ve known some smart innovative bankers. Just as an example, one of the senior officers of a local bank is also a fellow member of the Willamette Angel Conference, meaning that he invests his own money in startups – his own money, not the bank’s money.

Banking laws have discouraged banks from investing in your startup since the Great Depression of the 1930s, when lots of banks went under. You have to have some assets – like your house equity – and you have to risk losing them. And if your credit rating is bad, that’s your fault and not the bank’s, but it does make it harder for the bank to lend you money. And that means that you can lose your house.

Yes, there are exceptions to these rules. For example, The U.S. Small Business Administration (SBA) can guarantee portions of a commercial loan so you don’t have to. For that, ask your bank; those loans are managed by commercial banks.

And yesterday I posted 5 non-traditional ways to get startup money, on this blog. None of those involve traditional bank loans.

(image: mmaxer/Shutterstock)


  • RonCents says:

    Saving up funds to create working capital is another way to go. The next challenge is to find a place to build that capital that is safe, liquid and under your control. It is also better to use something that is tax sheltered. Cash value permanent life insurance can be a good choice for some people because it meets these criteria. If we can take over the role of the banker ourselves even if done gradually, we are in a better position and using our own money more efficiently. Just my 2 cents. :o)

  • reno iannini says:

    what does a non/dentist have to do get a bank loan, to build out dental office’s

    • Tim Berry says:

      Reno, there’s no standard answer to a question like that; you have to call a bank, maybe several, and listen to what they tell you. I’d guess the questions will be about who owns the assets, and who is going to make the payments, things like that. What the banks are about is minimizing risk. As per the post here, taking risks is sort of against the law.

  • Beth Parker says:

    Thanks for posting this. I had no idea that banks were prohibited by law from approving a loan based on a business plan.

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