6 Kinds of Small Businesses That Don’t Qualify for Bank Loans

Funding a new business is not something that most people can do on their own, and many turn to bank loans

For entrepreneurs, this can be the most difficult part about getting a new enterprise or business idea off the ground. Daniel Lieser, co-founder of TrustLeaf.com, a funding service that helps self-started businesses and entrepreneurs get starter loans from friends and family, shares the following six types of businesses that don’t qualify for most, if not all, bank loans.

1. Businesses That Are Too New
Early-stage entrepreneurs often waste valuable time looking for startup capital that they simply don’t qualify for yet. Banks usually look for businesses to be at least two years old before approving a loan, (especially for SBA loans).

What You Can Do:

For businesses less than a year old, most borrowing options require a personal guarantee from the business owner. Some of the best options for early-stage businesses are aimed at small businesses that already make revenue through a specific payments platform, such as PayPal’s Working Capital. Some online lenders likeKabbage are so flexible with their options that they don’t specify a certain number of months a business needs to be open. Kabbage also has a rather ingenious way to motivate the lenders who might have to fall back on using a personal loan: instead of using a stick, they use a carrot….or rather, a Karrot.

2. Cannabis Shops and Medical Marijuana Dispensaries

The difficulties of raising capital for cannabis startups is well documented (check out NPR’s Planet Money report), and the primary reason is as follows: banks are subject to federal regulation, and cannabis is still illegal on the federal level. Because of this, cannabis businesses can’t get loans. Most of the time they can’t even get a business checking account, which usually means that buyers have to pay in cash.

This has made it exceptionally difficult for budding entrepreneurs (pardon the pun) to compete against their better-funded rivals. While legalized cannabis is making some people rich, it’s not an easy kind of business to start unless you already have significant capital on-hand.

The Catch:
Even if the federal government decriminalizes cannabis, those who have non-violent drug offenses on their record may still be ineligible for the largest single source of small business bank loans, the Small Business Administration’s 7(a) loans program, which guarantees about $19.2 billion worth of loans.

3. Sexual Health and Wellness
If anyone understands the importance of sexual wellness and expression, it’s government bureaucrats, right? Whether you’re an upscale adult toy store like San Francisco’s Good Vibrations, or just a humble LGBT bookstore that sells a variety of adult books or products, you’re probably out of luck when it comes to benefiting from the SBA’s $19.2 billion a year loans program mentioned above.
6 Kinds of Small Businesses That Don’t Qualify for Bank Loans
Even “normal” businesses that sell just a few adult items are at risk of ineligibility. As long as some random bureaucrat determines that a business makes as little as 2.5% of their revenue directly OR indirectly from the sale of products that are “of an indecent sexual nature”, they are ineligible. (Actually, the SBA site is inconsistent on this. Most of the application forms say 5%, but perhaps in an effort to scare off otherwise-qualified borrowers, their main eligibility page says 2.5%).

4. Immigrants Who Don’t Have Green Cards

Most work visas for immigrants are tied to a specific employer, which makes the idea of starting a new business a moot point. Immigrants who are lucky enough to have a renewable 3 or 5 year visa without specific employment requirements, including the O1 visa for individuals of “extraordinary ability”, don’t qualify for small business bank loans.

5. Any Business that Employs Parolees
According to the U.S. Census, over 89% of employers are small firms of fewer than 20 employees. Since the recession, the Small Business & Entrepreneurship Council notes that over half of new jobs in the U.S. have been created by small businesses. It makes sense that we would want those who were recently granted parole to ‘go and get a job.’

Any “business with an “associate” who is incarcerated, on probation, on parole,” is ineligible to receive loans–this is according to the eligibility questionnaire that the SBA gives to the banks that actually provide loans. The SBA’s definition of the term ‘associate’ is extremely broad, and even includes any “close” or “secondary” relatives of an employee or agent of the business.

Similar to the restrictions mentioned above for businesses with even a minor “adult” component, it appears that the SBA might be trying to discourage potentially qualified business owners from applying in the first place.

6. Businesses Started by Someone Whose Credit is Less Than Stellar
Aspiring entrepreneurs with less than great credit scores may find it difficult to get the loans they need to start their own business. Yes, banks look at the health and revenue of the business first and foremost, but even loans that don’t require a personal guarantee often require the business owner to have ‘very good’ or even ‘great’ personal credit reports. If you want to know what category you might fit into, you are entitled to your free credit report every 12 months from each of the 3 major credit bureaus, which you can find at the government’s official site annualcreditreport.com

If you’re still paying Uncle Sam for past-due taxes, kiss that loan goodbye. Just like having a subpar personal credit report, owing back taxes when applying for a loan is what you could call a ‘non-starter’. Not only is owing back taxes a general indication that you have trouble fulfilling your financial obligations, but any amount owed to the IRS is a huge liability for the bank, since the IRS could come in and sell off your business assets in order to cover the debt.


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