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LHOFT :THE 360° OF FUNDRAISING: HOW TO UNLOCK BANKING FINANCING SUPPORT - Workshop
Corporate Banking 10/02/2021
SPUERKEESS.LU
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HOW TO UNLOCK BANKING FINANCING SUPPORT • Why do banks say “No” to startup loans? • Why are startups risky for banks? • The best ways to get a startup business loan
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Why do banks say “No” to startup loans? • Banks are typically risk adverse; • It is not a bank’s function to finance unsafe business models; • It is therefore very difficult for a new business to get a loan from a bank; • New businesses are in fact the riskiest loans of any that a bank might encounter. => So understandably banks are prudent about loans for startup companies.
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Why are startups risky for banks ? (1)
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To see why startup companies are risky for banks, let’s have a look at the 4 C’s of credit: • Capital: generally speaking, a new startup has often only few business assets or no business assets at all; • Collateral: a startup has generally little collateral unless it can use personal assets of the business owners or has co-signers with assets to pledge; • Capacity: there is no track record to show that the new company has the capacity to generate enough money to pay back the loan; • Character: there is no credit history available which can be used by the bank to assess. | SPUERKEESS.LU
Why are startups risky for banks ? (2)
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Furthermore …. • Lack of experience: In professional businesses, it's common for banks to deny a startup loan to someone who cannot provide proof of a long term working experience; • Lack of management: Banks may not be comfortable with a new startup that doesn't have a strong, experienced management team to add their help to boost the business; • Lack of customer base: It’s one of those "Catch-22" situations: you can't get a loan unless you have customers, but you can't start your business and get customers without the loan.
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The best ways to get a startup business loan (1) •
One of the best ways to get a startup business loan from a bank is to provide a strong business plan to answer all the questions a bank might ask and the objections that might be raised.
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Show how you plan to contribute capital to the business. o What are you contributing to the business yourself? o What amount of money have you already invested?
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Show where your collateral will come from and provide your own and your co-signers’ credit records;
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Show your management expertise as well as the one of your advisors and executives that have guided and will guide the business quickly to profitability.
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Include detailed spreadsheets to demonstrate when your business will have a positive cash flow;
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Show your experience with similar businesses, or show you have an experienced management team behind you;
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Show the bank that you have already convinced BA or VC to invest in your company. The bank will be reassured if there have already been a couple of equity rounds. | SPUERKEESS.LU
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The best ways to get a startup business loan (2) There are other ways to improve the quality of your loan application: • Contact Luxinnovation : they can help you determine what suits you best and provide the right support (state aids that can be pledged by the bank); • Contact the mutual insurance companies: (MPME or Mutualité de cautionnement). They do not directly lend money, but they give guarantees to a certain amount of the loan ; • Contact SNCI : SNCI is a public-law banking institution specialized in medium and long term financing of Luxembourg based companies. The bank can sometimes share the risk with SNCI; • Ask your bank about the European Guarantee Framework programmes InvestEU (which will be launched 2021/2022). | SPUERKEESS.LU
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