Funding Sources – Banks
Karl Dakin
I help you overcome challenges to raising capital. Take advantage of my Motivated Money Method to identify those investor candidates that are most likely to invest. Top expert in fundraising.
When I started my career, a startup business typically looked to their local bank as a source of funding.
At that time, the local bank met my current key factors for Instant Funding:
1.???? The banker and the small business knew each other
2.???? The bank had money from their depositors for the purpose of lending to small businesses
3.???? The bank was motivated to lend the money to make money on behalf of the owners and their depositors
Times change.
Too many bank failures over the years resulted in some deposit losses by people who were not covered by FDIC insurance. This doesn't look good for elected officials. Possibly more importantly, the bank failures lost money for the FDIC – the government institution insuring the deposits.
By my standards, banks are now a zero-risk source of funding. This means that they cannot make a loan if there is any chance of loss.
This standard is acceptable for those businesses that have some assets that may be used in a way that enables the bank to attain its zero-risk policy. The business may show its cash in the form of a down payment, which the bank then matches. This is the equity/debt ratio. The bank may lend one dollar for every dollar of cash put up by the business – 50/50. The bank may lend more money under certain circumstances.
One way that a bank will lend more money is if the business offers its assets as collateral – items to be sold in the event of a failure by the business to pay the loan according to its terms. These assets may be already held by the business or they may be acquired with the loan. Collateral has been discussed in a prior edition of this Instant Funding newsletter.
Another way that a bank may lend money is if a government program acts to guarantee the payment of the loan. There are many government programs, such as those of the US Small Business Administration, that will guarantee to pay up to 80% of the loan in the event that the small business defaults. The combination of cash and/or assets of the small business combined with the guarantee provided by the government places the bank in a zero-risk position.
The need to maintain a zero-risk position acts to disqualify nearly all startup businesses that are inherently risky. Loans may only be obtained if the founders of the business provide enough capital to meet lending requirements. This is often referred to as the ‘capital gap’ or ‘equity gap’.
Having enough capital still does not assure that a bank will make a loan. The small business may be:
·?????? Too risky (generally defined as something that a banker does not understand)
·?????? Lack of a good management team
·?????? Makes a poor application, indicating a lack of knowledge or sense of entitlement
Even if the small business should qualify by all objective standards, the bank may still turn down a loan application because:
·?????? The business is not known to the bank
·?????? The bank attained its lending quota by lending to other businesses
·?????? The bank has limited ability to lend because it invested in bonds or other securities that are not performing well, like Silicon Valley Bank
·?????? The bank has too many outstanding loans that are not performing to banking regulatory requirements, and the bank needs to avoid any lending near zero risk
A business considering a bank loan should schedule a meeting with a senior lender who may actually sit on the loan review committee and who can give the business an accurate forecast of the likelihood that a loan application will be granted.
The best banking loan officers will accept an invitation to visit the business and see its operations. This aids in meeting my first key factor of knowing your investor candidate.
In today’s banking world, the lending decision is commonly made using algorithms in a central office far away from where the business operates. The small business should know if its operations will impact the algorithms used by the bank. Is the business that qualifies for certain government lending programs that may reduce collateral requirements and/or offer a reduced interest rate?
With all these challenges, why consider banks as a source of funding? The answer is that banks commonly offer funding at the lowest price of money. The interest rates charged on a loan represent a lower cost than giving up a share of future profits through the sale of equity ownership. Since the price of money is paid out of the profits of the business, entrepreneurs seeking to preserve as much of the profits for themselves need to consider all funding alternatives.
Superpowers for Good
I had the pleasure of being interviewed by Devin Thorpe on his SuperPowers for Good show, which is affiliated with the Impact Cherub Club and SuperCrowd. We talked about impact investing, investing in small businesses as a wealth-building method, and access to capital through investment crowdfunding. Devin advocates supporting small businesses through Reg CF crowdfunding and strongly believes that systematic investment ($100/month) in small businesses will build wealth at a rate comparable with more common investments in Wall Street or real estate.
The show may be viewed at the following link:
?Don Cohen
领英推荐
?I was a guest on Don Cohen’s show Wednesday. The other guest was Russ Hedge, who is an expert on LinkedIn in building crowds and obtaining sponsorships. We had an interesting conversation on the importance of relationships as assets and the need to build a community.
?Successful Funding
?I hosted my Successful Funding show yesterday on LinkedIn Live. My guest guest was Emiliano de Laurentiis. Emiliano is the founder and CEO of Knowledge Avatars. It offers services in creating artificial intelligence learning management systems (AILMS) that can be customized to share selected information in the manner of a digital receptionist or sales assistant. We discussed the difference between avatars and chatbots, the use of artificial intelligence in supporting small businesses, and the great advantages that are attained when artificial intelligence can be customized/personalized with information not available to the public.
You may view all of the Successful Funding shows in my Posts on my LinkedIn profile at: https://www.dhirubhai.net/in/karldakin/
?The Successful Funding show on my LinkedIn profile will repeat weekly at 8 am MST on Tuesdays. You may register to attend by going on LinkedIn, searching for Events, clicking on the Events button, searching for Successful Funding, and then clicking on the Attend button. You should receive an email with a link to save to your calendar. You can also click on the Share button to obtain the URL link to the show and put it in your calendar.
?Founded in FOCO
?I will be presenting a workshop on the topic of What is Your Funding Potential? on March 8 from 11:00 am to 12:30 pm in Fort Collins, Colorado at the Founded in FOCO event.
?SuperCrowd 2024
?I will be co-hosting the SuperCrowd 2024 event: “The Impact Crowdfunding Event of the Year” that will be held April 17th and 18th online.
?Motivated Money Half-Day Workshop
?Subscribers to the Instant Funding Newsletter are invited to attend a half-day workshop where I will present my Motivated Money Method to raise capital. Subscribers qualify for a 20% ($100) discount from the standard $500 price. Use the discount code: Instant Funding
?Thursday, February 29 -? 9 am to 1 pm MST - Zoom Online
The workshop will instruct on the Motivated Money Method of raising capital that targets investor candidates who are 'most motivated' to provide needed capital. Attendees will receive a workbook, templates, and a video recording and transcript of the workshop. A single organization may have up to three representatives may participate for a single registration fee.
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Karl Dakin, the Capital Coach
Dakin Capital LLC
Managing Partner at Guided Imports | Freight Forwarding Expert
9 个月That's valuable advice. Understanding how to present a low-risk situation is key when seeking funding from banks. It's all about building trust through a solid credit history, financial stability, and a well-thought-out business plan.
I help you overcome challenges to raising capital. Take advantage of my Motivated Money Method to identify those investor candidates that are most likely to invest. Top expert in fundraising.
9 个月There are many sources for small business funding. The small business needs to know who will provide funding and the cost of money.