Question

Why do you think banks usually don't lend money to start-ups?

Answer 1

According to me banks dont lend to startups due to floowing reasons

1.STARTUPS ARE RISKY: According to banks, startups are risky because they have just started with their business and presently they have not earned any profit, there are chances that the startups may incur loss or profit. And if they are in loss the bank is in a big trouble as the startups will be unable to repay their debt.

2.LACK OF COLLATERAL: The banks usually need collateral in order to disburse a loan so that the risk is limited. But the startups usually do not have anything to offer as a collateral which results in the refusal of loans disbursement by the banks, as banks cannot take such a big risk of lending money without collateral. So they refrain lending to startups.

3. LACK OF CREDIT HISTORY: Credit history is analysed by the banks in order to check your worthiness.Lack of credit history or bad credit history may make your application of loan get rejected and the startups usually do not have any credit history as they are very new in the market. So the bank do not take risk of giving loan to such startups who lack credit score or have a very bad credit score.

4. WEAK CASH FLOW: It is very important for the business to have a good cash flow ie amount of money with them in order to take a loan because banks prefer businesses with strong cash flow in order to disburse loans. But the startups do not have enough cash flow so banks refrain giving loans to them.

5. NO MARKET STATUS: Since the startup is new in the market, nobody knows what is the person upto who is running the startup business. He has no market status and nobody knows him, so it becomes difficult for bank to trust such kind of person.