Bank funding for startups
Access to bank credit to SMEs, especially those in their early stages (”startups”), is often considered a pipe dream. Although some of them have already started their sales, they have an interesting journey in metrics (downloads, users, customers) and have even attracted private investors for already significant amounts (30-50k), there are few startups that consider going to the bank in search of funding, and the most they expect from banks is that they grant them a credit card and, if lucky, a small loan (15-20k) with personal guarantee, of course. The barriers that prevent this type of company from accessing “relevant” bank financing (50-80k and even 100k) are mainly two: on the one hand, the lack of economic-financial path since these are usually recently created companies with 1 or 2 years of history and, on the other hand, the lack of guarantees or financial support since these are generally young entrepreneurs whose main contribution is their time and exclusive dedication to the project. However, initiatives are beginning to appear in Spain that are aimed at reducing barriers to access bank funding for startups and entrepreneurial projects, offering guarantees or financial guarantees to pre-selected projects. This is the case of Catalan Institute of Finance (known by its acronym as ICF), which provides guarantees of up to 70% for the formalization of bank loans to entrepreneurs. Although, despite the fact that these initiatives partly solve one of the two barriers identified (the lack of guarantees), the formalization rate of these grants remains very low for most cases, mainly because banks continue to be very skeptical and act very conservatively. The good news is that with work and preparation, most startups can significantly reduce both barriers and “connect” with the banking sector. How do you achieve this? Understanding that banks, and the people who work in them, have a very defined methodology for evaluating the risk of each trade, they are not experts in new technologies and also, unlike other investors, they have a lot of trading volume and very little time (just minutes) to evaluate each of them. For them, the language spoken by a technology entrepreneur is not easy to understand. Speaking somewhat different languages, entrepreneurs and bankers struggle to establish mutually beneficial relationships. The role of Intelectium in these cases, it is to ensure that entrepreneurs and bankers can speak the same language in this type of operation. This, in addition to increasing the chances of success, significantly reduces the time it takes for an entrepreneur to develop specific documentation for the bank, aligned with the risk analysis criteria of the most traditional banks. The result is that about 90% of requests managed in this way end up being approved. On the contrary, the absence of this collaboration results in a large part of these operations not being approved. In the last call for ICF grants, which ended this past week, Intelectium managed to raise more than 1.5 million euros for about twenty projects, with funding of between €50K and €100K in each case. And the good news is that it seems that the ICF will extend the period for requesting guarantees with a new call scheduled for this month of March 2014. So let's see how entrepreneurs can benefit from these loans:
- Step 1. Get your help in the form of a guarantee at ICF. The procedure is similar to other public grants, where they analyze the company's business plan as well as its accounts and economic-financial projections. You have more information on their website: http://tinyurl.com/ceavpo4
- Step 2. Once the aid has been approved, contact the bank providing the ICF aid resolution as well as other documentation typically requested by the bank (accounts, taxes, deeds, etc.). In addition, banks usually request a report in the form of an executive summary of the transaction, emphasizing the key points of your company as well as detailing as much as possible the uses of the financing to be requested. As we said above, the most important thing is to include critical information for the bank's team of risk analysts, which is not the same as the director or manager of the branch where you are presenting it. The role of the bank's director or manager is to help you process the file and defend the transaction (he has “intangible” information that he can transfer, since he has met you in person and you may even be a client with a certain background in the office) to his risk partners.
- Step 3. Choose wisely who to work with. Just as not all banks have the same risk policy, different people in the same bank apply different criteria. Therefore, it is important to know which branches are most used to dealing with early-stage technology companies (”startups”). Obviously, their form and criteria for analyzing and channeling the operation towards risks will be different.
- Step 4. IInvest your money well. The most rewarding thing for the bank will be to see how, at the end of the year, you have achieved even a large part of the projected sales, as well as other advances in product and structure (especially personal). Knowing how to report progress to the bank, on a regular basis, before asking for money again is essential for the director or manager to continue to believe in the project, so that the “intangible” that you accumulate serves for a subsequent extension of the loan or the granting of other products, such as working capital financing, etc.
The next call is not yet published, but whether you haven't obtained funding on a previous occasion or if you're thinking of applying for it again, this is the right time to start thinking about how you're going to get it. ICF grants are aimed at SMEs, freelancers, businesses, startup entrepreneurs, etc.. It doesn't necessarily have to correspond to a technological project. If you need more information you can contact us thru Lluis Vidal, author of this article, together with Patrick Hunt, managing partner of Intelectium.
