One of the most powerful things you can do when negotiating is to see things from the other person’s perspective.
To find out why banks don’t finance business startups I want you to put yourself in the bank manager’s shoes when he meets an eager entrepreneur looking for cash to finance the great (ad)venture.
- I don’t know you.
- You’ve got no track record of running your own business successfully.
- You’ve got little management experience.
- You don’t know the trade you want to go into.
- You haven’t done your homework.
- The proportion of money you’re putting into the business is much less than the money you want to borrow.
- You’ve got no security to cover the loan so the bank can’t get its money back if things go wrong.
- Your business concept isn’t proven.
- Your presentation and business case is badly explained with little logic and pie-in-the-sky numbers.
- You don’t have a management team in place so the business can carry on if anything happens to you.
- There’s nothing special about your business which will cause customers to choose you rather than your competitors.
I could go on but long lists of bullet points are tough to read.
It’s easy to criticise banks and in many cases right to do so.
But business startups are making rejection inevitable by making unreasonable requests.
If you think as the bank manager thinks, you’ll see that he’s got a number of interests:
- He wants to protect his own position. He doesn’t want to look like an idiot and propose a no-hope situation to the credit committee to get final approval for the loan. He’ll lose the respect of colleagues and his boss and make them more reluctant to back his judgement on other proposals.
- He wants to protect the bank. A bank isn’t there to provide risk capital and one bad loan which doesn’t get repaid takes away the profit from many good ones.
- He wants to protect you. If your proposal is only so-so but you’ve got security (e.g. your family home), the bank can protect its position but you’re taking big risks.
Banks are in the business of lending money but it’s much easier to lend to an existing business with a proven record of sales and profits and with a stable and experienced management team in place.
Banks want to invest in winners (and avoid the losers).
The big question of you want to get finance from a bank for your business startup is “How can you give them confidence that you are a winner?”
It starts by trying to avoid the black marks that I listed at the start of this article. The more of them that apply to you, the less willing a bank will want to finance your startup business.
So what can you do instead?
First, can you put more money into the business yourself. I’ve known entrepreneurs who have money but didn’t want to risk it in the business. That sends a very clear signal to the bank about your confidence in the business idea. If you’re not confident, there’s no reason why the bank should be anything other than very nervous about risking its cash.
Second, can you borrow the money from family and friends or even have them as silent partners who own part of the business? My advice is to formalise any agreement – what interest you will pay, when you hope to repay the cash, what happens if you don’t? Also, if shares are involved, what happens if one person wants to sell up? It’s a good idea to get legal advice but it can be expensive and that creates a chicken and egg situation.
Third, think about what you can do to bootstrap your business. The sooner you get your business making profit and generating cash, the less finance you will need. I hate to hear business owners talking about “breaking even in year 3.” Look at how you can boost your revenues and trim your expenses by avoiding unnecessary costs at the early stage of your business.
Focus on what’s critical and delay the nice-to-have items.
Take advice where you can. From other entrepreneurs and from professional advisers. Often good advice is a lot cheaper than bad advice or no advice. It saddens me when I see essential money wasted on marketing that obviously won’t work because there’s no clear message or offer.
You may want finance for your business startup but it can often be used to disguise mistakes and inaction. These only become clear when the money runs out.