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Bank Financing For Your Growing Startup: Everything You Need To Know

Learn more about choosing the right bank financing option for your growing startup.Finding the right bank financing option for your company is no easy task. In an ideal world, you would be able to fund your business with independent capital, but most startup owners do not have that option. 

Explore the kinds of bank financing options available to emerging startups like yours, and learn what qualities you should look for in a funding partner.

Big Banks (J.P. Morgan, PNC, Citizens, etc.)

Big banks offering commercial bank loans are usually focused on historical financial statements and cash flows. And, they generally care less about your future and ideas. So, this is likely out of reach for early stage companies, but is a preferred option for more established businesses. There are a number of benefits to working with big banks. They usually offer better rates, have covenants and do not normally ask for equity.

This bank financing partner is ideal companies with:

  • Strong historical financial performance and the financial statements to back it up.
  • Collateral (AR and/or inventory).
  • A gradual, not rapid, growth model.
  • A willingness to offer personal guarantees if the business is closely held.

Venture Banks (Square One, Bridge, SVB, etc.)

Venture banks are a unique type of bank, focusing primarily on venture capital-backed startups. These banks prefer working with companies that have a financial sponsor and use less restrictive covenants than big banks. 

A primary benefit to collaborating with venture banks is their expertise in cultivating and funding growing startups. While they may be more expensive than big banks and may ask for more equity, venture banks have established connections to other funding sources. And, these banks have a great interest in the future of you company. Their forward-looking interest makes this option best for venture capital-backed or private equity-backed startups. Venture banks tend to be more flexible than the big banks, with a better understanding of the challenges of a startup and the funding cycles. 

Commercial Finance Companies (Gibraltar Business Capital, Gerber)

Commercial finance companies offer solutions for businesses facing rapid sales growth, limited operating or credit history, negative operating performance or cash flow, and/or a lack of tangible net worth. These institutions are not banks; they lend in a similar way, but with higher interest rates and additional fees. Some things to consider include greater restrictions on funds availability and lower advance rates. They do, however, offer more flexible covenants.

These commercial finance companies can seem intrusive to an entrepreneur. So, you will need to develop a relationship and work hard to earn their long-term trust. 

4 Questions You Should Consider When Looking At Bank Financing Partners

1. What factors will banks look at to determine your funding? Banks will want to see the following pieces of information during the loan application process:
  • Financial statements (historical numbers)
  • Projections (future numbers)
  • Capital table (list of the shareholders and investors)
  • An overview of the business
  • AR and AP Agings
  • A list of your investors

2. How do you determine if you are getting a fair deal? Solicit multiple proposals and talk to various lenders in the market. Comparing the proposals you receive will tell you what is fair. Do not just go with the first institution you talk to. Also, check references. Ask to speak with, not only happy customers, but those who had challenges and defaulted on a covenant. Doing so will help you to determine how a funding partner will react to not only the good times, but the tough times as well.

3. When should you turn to a bank for funding? Start your search for a funding partner once your startup has been profitable for two to three years.

4. What should you look for in a bank financing partner? The answer to this question is different for every business. Do your research and talk to other CEOs who have worked with that bank. Ask about their experience with the lender to get a better idea of what your relationship will be like. Get to know not only your loan officer, but his or her boss and boss’s boss, as well. If something goes wrong, you should know with whom you are dealing.

Consider what you need from a bank, like location, global reach, and offered services (i.e. credit card processing, wire transfers, etc.) Try to partner with a lender that has expertise in your industry and can provide strategic advice for growing your business.

When you find the best fit for a bank financing partner, you are ready to take the next step in your company and focus on growth. Carefully consider your funding options and choose the one that best aligns with your future goals.

Want to learn more about managing your business’ funding? Download this tip sheet on why you should outsource your finance and accounting needs.

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