Banks and Loans

An early stage technology company will almost certainly need some kind of financial support to successfully get started. The key problem is that most institutional funding organizations (e.g. banks and most conventional investors) will be accustomed to investing in very different propositions (see the funding gap opposite). While you may get some support from the bank you will almost certainly have to put up some sort of personal security against the loan. Be very wary of this; remember that setting up a business and commercialising research is extremely high risk. If you are unable to pay off your debts the banks will collect on their security. Your bank is not a charitable institution. It is in business to make (not lose) money. Consequently, when a bank lends money, it requires assurance it will be repaid. To maximize the possibility of being repaid, the bank will look at your past business and personal financial history to determine that you have met such obligations in the past. If you have a less than stellar personal credit history, that will influence the bank's decision to lend.

The Five C's of Credit

The bank must consider the 5 "C's" of Credit each time it makes a loan. Review each category and see how you stack up.

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment. Payment history on existing credit relationships - personal and commercial - is considered an indicator of future payment performance. Prospective lenders will also want to know about your contingent sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit funding. If you have a significant personal investment in the business, you are more likely to do everything in your power to make the business successful.

Collateral or "guarantees" are additional forms of security you can provide the lender. If, for some reason, the business cannot repay its bank loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable and in some cases inventory are considered possible sources of repayment if they can be sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, to purchase additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion about your trustworthiness to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered.

Read More: 5 C’s of Credit Analysis