Startup founders are passionate and optimistic. That’s why we love to work with them. However, we often see them stumble when making a case to a bank or lender for debt or credit financing, especially in the current environment.
Banks and Lenders analyse risks in a business differently to venture capital funds, so startups need to understand what information the bank is seeking. Remember, banks expect their capital to be repaid under contractual terms as they’re not taking the same risks as an equity investor.
Banks focus on the company’s financial plan and want to understand the business KPIs and key drivers for growth. Banks want to understand the enterprise value (EV) and plans to attract external capital (or if existing investors have enough funds and intention to continue to support the business).
COVID-19 Impact Planning
In the current environment, banks are keen to understand how COVID-19 has impacted your business. Banks will typically want to see a “Base Case” and a “Worst Case” financial plan to understand the sensitivities and how well the team are planning to navigate the economic headwinds. Highlight the levers you can pull to cut costs if necessary and equally how you can quickly return to growth when economic conditions allow.
Questions Banks will ask
Banks typically leverage the due diligence that the venture investors have completed on the team and technology, so while important for startups to outline their Exec team experience and technology advantage, they will not have to do a technical “deep dive”. Banks are keener to understand who you are selling to, how you differ from competitors, and your business model.
Banks offer financing to a range of companies, often competitors within the same sectors, which give banks a view on your sector and key metrics, so banks will ask about your competitive differentiation. Many VCs, in contrast, typically invest in one company per sector, and don’t invest in competitors.
Approach Banks early
The timing of when you approach a bank for funding will impact their ability to provide terms. For instance, a mistake companies sometimes make is to wait until they have burnt through much of their cash before seeking a loan. For a loss-making company, this means there’s no obvious source of repayment. You will maximise your negotiating position and banks will have most appetite either at the time equity is raised or shortly afterwards. That cash buffer gives Lenders more certainty.
Here’s the financial information that can help you persuade a bank to provide a financing offer
• Detailed Monthly Profit & Loss, Balance Sheet and Cashflow for previous (showing performance vs plan), current and next year – for Base Case and Worst Case scenarios
• Include any Government support scheme applied for in these financial statements
• Most recent Pitch deck, Management Accounts and Accounts Receivable ledger
• Key business metrics the Board are tracking
• Key milestones you wish to achieve with timescales
• Corporate structure chart showing locations of any subsidiaries
• Detailed “cap table” showing shareholdings of key investors
• Plan to raise next equity round, or plan to reach profitability
• Amount of loan or credit facility sought and plan for use of funds
Which type of bank financing is right for you?
There are several different types of bank financing solutions available for most viable companies. These range from venture loans at the early-stage, to growth loans and working capital lines for companies with many £millions of revenue. We have written about this range of financing solutions and when best to take them here: A guide-to-financing-growth.
Whichever type of financing you apply for, be open to suggestions from your bank on the structure. Clearly describe the use case and the lender should be able to provide the right solution. For example, if profitability is far off and your goal is to boost revenue growth, then a venture loan may be more suitable than an overdraft or revolving credit line. If revenues are increasing and you’re wishing to solve seasonal cash fluctuations, a working capital line may be suitable to smooth your cash profile.
How to present the financials
By presenting the detailed financial information that the bank asks for, the quicker and easier it is for banks to assess and provide the best options for your business. The frequency which companies submit very basic financial statements with no detailed cashflow or balance sheet forecast or COVID-19 scenario plan is surprising.
By providing comprehensive financial information, not only will this make for a faster process, it provides the lender with evidence you have good financial controls and run a well-managed company.
This article originally featured in UKTN.