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Why Business Loans Are Tough for Young Companies to Get

Why Business Loans Are Tough for Young Companies to Get

Thales Financial has had the opportunity to work with more than one young company in need of financing but unable to get small business loans. We typically explain that the service we offer does not constitute a loan. Rather, it is accounts receivable factoring. Our service can help young companies meet short-term financing goals while they grow their businesses.

As for business loans, they are tough enough to get even among established companies. Younger companies find getting loans nearly impossible. There are reasons for this, reasons that make perfect sense when you stop and think about them.

Banks Need Some History

Banks need to be incredibly careful about loan decisions. When a young company comes looking for business loans, the bank finds itself in a tough position. Banks need a bit of history they can look into in order to verify a borrower’s creditworthiness. But younger companies do not have that history behind them.

A company that has only been in business a year or two doesn’t have a long track record of taking out loans and paying them back. Not only that, but a general rule of thumb is that new companies do not start turning a doable profit until their second or third year. A younger company might still be losing money. But even if not, a low profit margin could make the company a loan risk.

Banks Need to See Active Credit

Another aspect of determining a borrower’s credit worthiness involves looking at its current credit situation. Just as with retail loans, business loans are based partially on a borrower’s ability to pay on time. So it’s reasonable to assume that banks need to see some active credit when a company applies.

A lack of active credit makes it harder for the bank to determine whether a young company has a track record of paying its bills. This is not to say that the company is behind on its bills, but just to say that there is no way for the bank to know without active credit to look at.

Banks Need a Manageable Debt-to-Income Ratio

One last thing that banks look at to determine credit worthiness is the borrower’s debt-to-income ratio. Though there are exceptions to the rule, that ratio tends to be higher the younger a company is. Banks want to see the ratio come down before they are willing to lend. Their position is reasonable.

How Accounts Receivable Financing Is Different

It is clear that banks hesitate to offer business loans to young companies. That’s probably a good thing given the amount of risk they take. We offer an alternative in accounts receivable financing. What we do is completely different.

We do not make small business loans. Instead, we purchase accounts receivables (unpaid invoices) from clients at a discount rate. We provide the bulk of the purchase price up front and the remainder when the invoices are actually paid. We earn our money by charging a fee for services.

It is easier for younger companies to access accounts receivable factoring because decisions are made on the creditworthiness of the borrower’s customers, not the actual borrower. So maybe a company has only been in business two years but many of its customers have been around for 10. Those customers are in a much stronger position. That is what factoring companies are most concerned about.

If you operate a young company and you are struggling to get business loans, give Thales Financial a call. We might be able to arrange accounts receivable financing to help you meet your short-term goals while you grow your business.