I hear a lot of entrepreneurs complaining about the fact that they banks won’t lend to their business and how badly done by they are as a result. I have a different perspective on this which is that banks are naturally risk averse (seriously, they are) so they are more likely to say no than yes. In the world of a banker they have choices. Things like whether to lend £50K to you to do your web start-up or to lend £400K to someone buying a house or £1 million to a ‘real’ business with real collateral that they can secure themselves against. As a web entrepreneur you need to accept early that you are well down the list of people that a banker wants to see coming through the door. You are just too much hassle, not enough margin and way too much risk. if your business looks like a falling knife, no banker is going to want to catch it.
All of this means that its up to entrepreneurs to pitch their business in a way that can make sense to a banker and make him/her want to put their neck on the line and convince their boss to lend to you. This means you need to:
- Build a relationship with your bank manager so that they know who you are, what you are trying to achieve and so that they believe you when you tell them something.
- Know your facts about the government backed schemes that are out there and that they can get access to so that they can lend you the money you need.
- Have a plan that is realistic and credible, written in language that they can understand and that demonstrates what you have achieved already.
- Make them understand your business. This can be hard. Try practicing on your Mum first.
- Understand the numbers because this is all that they understand. You’ll be asked lots of questions about the numbers and if you hesitate with the answers or even get them wrong, your credibility will be shot.
Over the last 5 years we’ve raised two lots of funding from our bank to help bootstrap Learning Pool, taking advantage of government backed security schemes on both occasions. We were also refused funding from five banks in the very early days but I really think that’s because we didn’t follow the rules above. Securing bank finance has been really hard, time-consuming and pretty boring but ultimately we did it and it saved the company and allowed us to grow. Its well worth getting this stuff right.
In general, I think banks are willing to lend but only to viable businesses who can demonstrate that they have the ability to repay the loan in the short to medium term and to survive in the long term. If you are going to get any cash from your bank, you really need to be able to demonstate that you can do this so that you avoid that door being slammed in your face.