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A true startup venture can range from simply an idea in an entrepreneur's mind to a small scale enterprise funded by the entrepreneur using personal or other resources. At this stage the enterprise my be legally chartered as a sole proprietorship, an LLC, or a corporation. Also at this stage, the enterprise will almost always have a negative or barely positive net worth. Enterprise cash flow at the startup or near startup stage will also tend to be erratic and somewhat unpredictable.

If your company or company idea is at the pre-startup (seed), startup, early startup stage by all means avoid the excruciating frustration of attempting to seek a any kind of business loan from a conventional lender. I define a conventional lender as almost all banks and insurance companies. Every banker that emerges from Business School or the bank's own management training program into the role of a commercial lending officer is relentlessly brainwashed into never making loans to businesses that lack an acceptable credit history, a highly predictable and easily understandable cash flow model, and valuable and relatively liquid collateral. If your startup venture lacks any of the prerequisites listed above in terms of credit history, cash flow, and collateral forget about it. As you look into the thousand yard stare of the uncomprehending commercial lending officer you suddenly realize that you might as well be from Mars. Don't take my word for it; just ask Steven Jobs, the founder of Apple Computers, about his somewhat humorous attempts to get commercial loans while Apple was at the startup stage.

It is important to understand the bank's perspective when looking at a startup venture. Banks are in the liquidity and risk management business. If a bank were to make a loan to startup business their best outcome is to receive principal and interest payments on time. If your business becomes another Federal Express or Apple Computer the bank doesn't make an additional dime. If the startup fails, as many startups do, the bank loses money. From a bank's perspective it is much less risky and much more profitable to make loans exclusively to established businesses and in the event of a business failure they recover most or all of their investment funds by attaching the collateral pledged by the business.

For entrepreneurs at the startup stage creativity and aggressiveness are needed to solicit investment funds from more imaginative funding sources. Private investors looking for new opportunities, the so called Angel Investors, are an important source to target. Certain types of formally chartered Venture Capital pools are also open to funding startups even at the seed stage. Many ultimately successful startup ventures began with "friends and family" funding. Some other successful startup ventures were funded using the personal lines of credit available to the entrepreneur. In all of these cases except the last one, however, the entrepreneur will have to give a piece of the business in the form of an equity stake in the business. Given the risks involved at the startup stage sharing equity in your new business is not unreasonable.
As your business succeeds, your investors will succeed.

After your business moved beyond the startup stage a time will come when it will make sense to approach a commercial lender for a line of credit or compensating balance loan. At this stage of business growth bank financing may be significantly cheaper than additional equity financing. At that time, however, you can bask in the knowledge that you didn't waste any time at the crucial startup stage waiting for your local commercial lender to get out his spreadsheet.

Learn more about this author, Cary Dowalt.
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