How to win financing from a bank without any hurdles – 3

I recall a small business that was visited by a bank officer to make sure that the business indeed existed and was doing well before financing was issued. However, when the officer inspected merchandise on the shelves, he discovered that they were empty boxes, with some having stones in them.

The shop was displayed in such a way as to convince the banker that the business was thriving, but  the customer’s dishonesty was laid bare and that was the end of his relationship with the bank.

There are customers who present financial statements that are grossly exaggerated and don’t represent a true picture of their businesses. This can be discovered by comparing financial statements and bank statements. If there is a mismatch, then the financing request is automatically declined.

Bank customers usually argue that any mismatch is due to most of their clients paying in cash and some expenditures being made in cash. Bankers can discover this by looking at expenditure records and existing stocks to make sure that the cash has indeed been used for purposes stated by customers.

Financing applicants should be honest when providing business information and there will be no difficulty in getting appropriate amounts of facilities for their businesses. Why should one be dishonest in order to get an amount that does not match their business? If you do so without being discovered, this will eventually be known when you fail to honour your obligations, landing you and the bank officers who initially engaged you in trouble.

A customer also needs to ensure that the business they are seeking financing for has existed for at least two years and has good results. This is absolutely necessary when one wants to win financing from a commercial bank. It is also the most misunderstood aspect among customers, some of who tend to think that they can secure financing by having a good proposal and collateral only.

In most cases, commercial banks are reluctant to finance startups for the simple reason that the failure rate of startups is very high and banks have to safeguard depositors’ and shareholders’ funds. The bitter truth is that the probability of getting back financing extended to startups is usually remote in current circumstances.

I have first-hand experience of this when a handful of startups were financed based on the other three factors discussed and the existence of collateral. They all ended up failing to repay financing extended to them.

It’s better that startups are financed by venture capitalists, who are ready to take risk in anticipation that even when several of these businesses are unsuccessful, they will be in a position to recover their losses from the successful ones. Startups can get financing from commercial banks when there is a partnership with other institutions that can secure these facilities in case of failure, or when a special fund is set up by a bank in order to encourage innovators.

They cannot be financed under normal procedures. In order to win these special funds, novel ideas stand a chance and their probability of survival has to be very high. It is therefore not a simple procedure.

There are also two other circumstances banks can consider to finance startups. First is when a customer has another well-established business, which has good cash flow that be used to repay financing extended for the startup if it fails.

Second is when a customer is in a position to be guaranteed by another business owner or company, which has an established business. In the case of guarantee, proper legal documents are signed and when the startup fails to meet its obligations, the guarantor will step in.

Dr Muhsin Salim Masoud is a seasoned banker and academic, who has also served as managing director of the People’s Bank of Zanzibar and Amana Bank. [email protected]