Banks and other financial institutions are very valuable
sources of funding for most new business ventures. However, acquiring startup
funding from banks is never an easy process because of their stringent guidelines.
It makes sense for most entrepreneurs to study the funding approach of banks, modify
their funding approach, and then tailor their business proposals accordingly in
order to meet the requirements of banks. By doing this, entrepreneurs will greatly
improve their chance of obtaining the desired
seed funding. Here are some common but basic requirements of most banks:
a. Prospective cash flow
Entrepreneurs applying to banks for seed funding or for the expansion of their new
business ventures must show sufficient cash flow to make the loan payments. Banks
will often reject applications if a prospective or existing company does not demonstrate
this.
b. Experience
Another determinant that often works in favor of
entrepreneurs is their experience.
Business owners should demonstrate they have experience in the field and are competent
enough to operate the business successfully. An entrepreneur who has some experience
running a company and is looking to set up a new business will find it much easier
to obtain capital from banks as opposed to one with no previous track record.
c. Assets
Banks also prefer investment opportunities
in new businesses in which entrepreneurs have financial reserves and personal collateral
sufficient to solve any unexpected problem. By using their property as collateral
when obtaining a loan, the entrepreneur may increase their chance of securing funding.
d. Business proposal
Developing a business proposal is essential for every
entrepreneur who seeks funding.
Before approaching a bank for startup capital, the entrepreneur must first devise
a well-detailed business plan, focusing not only on the products and services they
will offer but also on the prospective finances that will be generated. The financial
forecast is a very important component of the business plan, as it demonstrates
a companyâs ability to viably survive while generating large returns.
e. “Break-even” analysis
While developing the financial forecast of the new business, an
entrepreneur needs
to analyze if and when the new business will âbreak even.â This is the point at
which the cost of expenses of the new business is equivalent to the revenue generated.
If financial studies and market research indicate that the new business will not
reach the âbreak evenâ point, even after five years, an entrepreneur should avoid
developing such a business. Investment opportunities that do not demonstrate a âbreak-evenâ
point after a few years will also be extremely limited in terms of
obtaining funding.
f. Competent staff and management
An entrepreneur who does not have experience in operating a business can gain credibility
by hiring people who have such experience.
Business investors like to see that the new business has been able to attract
top staff and management personnel to operate a company.
g. Prospective investors who are interested
Another way to get business capital from banks is by approaching them with a list
of investors who are interested in their business proposal. Often times, banks will
agree to invest in a new business if they feel that other investors have also seen
potential in it.
f. Credit
New business owners can also improve their chances of getting access to capital
resources by improving their credit report. There is no other determining factor
that can hurt an
entrepreneur’s chance of receiving funding more than a poor credit
history. Credit checks should be made regularly and repaired immediately before
approaching a bank for funding.
Conclusion
There are many different ways in which an
entrepreneur can increase their chances
of obtaining capital from a bank for their new business. First, they must show that
there is cash flow to ensure that monthly payments will be made on time. Second,
it always helps if the business owner has experience in the field and collateral
to secure their loan. They should also construct a solid business plan that demonstrates
a âbreak evenâ point. For those
entrepreneurs with no business experience, they
can hire management and staff with a strong track record of success. Banks may even
provide funding when the prospective entrepreneur can provide the names of investors
who are interested in their given venture. Lastly, a strong credit rating will help
with the loan application.