Challenges and work around for banking challenges for start-ups

For any start up, there are two stages: the start-up stage and the expansion stage.

In the start up stage, which is the beginning for the start up, where the entrepreneur journey begins, European banks are not too keen on extending loans. This is a stark cultural contrast when compared with US banks. So, the most common ways to raise capital for European start ups are the Three Fs, namely friends, family and the Founders themselves, though not necessarily in that order.

Bank loans are still possible, but they might require strong collateral and great credit records of all the owners. However, apart from the Three Fs, and banks, there are quite a few other sources as well for the budding entrepreneurs. For example, there are different government schemes available exclusive for the technology and fintech start ups, which may be accessed. There are public authorities and capital contributing business houses as well. And of course, there are venture capitalists, who work exclusively in this domain, financing prospective ventures.

In the expansion stage however, it is much simpler to get bank finances, as by then, revenue streams have been established, initial risk of business failure have been mitigated, and future growth can be ascertained, by extrapolation, and jumps due to new contracts, product expansion, etc. The later part of the expansion stage is the steady state, where growth rate may slow down, but volume of business has grown multiple times, and revenue streams are steady. It is at the end of this state that a start-up matures into a full fledged business enterprise.

It is very difficult for a new business to get a loan from a commercial bank for business startup. New businesses are in fact the riskiest loans of any that a bank or lender might encounter. So understandably they are nervous about startup loans. In professional businesses, it's common for banks to deny a startup loan to someone who doesn't have at least a year of experience working in the profession. Because new businesses don't have business credit of their own, the bank has to look at the credit of the people who own the business. Banks often deny startup loan requests because the personal credit of the borrower has problems. For example:

• The problem may be as little as one negative rating on your credit report, but that may be all it takes for a bank to say no.
• Low credit ratings also affect the ability to obtain startup funding. These days, any score under 800 is suspect, so you will need to know your credit rating and work to raise it.

With a traditional bank, opening a current account can be a huge hassle. You’ve to stand in those long queues, fill up hundreds of forms and wait for many days to finally gain access to one.

But the real blow here is the high minimum balance requirement that most current accounts these days, come with. Especially for startups like yours that need all the cash that they can find. The lack of instant gratification and huge waiting time do not sit well with any founder. A visit to any bank is almost synonymous with standing in line, waiting for your turn with all the documents that even remotely carry your name.

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