Financing start-ups: the end of bank loans soon?

How to get a bank loan when you are a start-up?

Access to financing for start-ups

In general, access to financing is a major problem and well known to all start-ups. This problem arises particularly in the seed phase, but also during the development of the structure.

Companies can apply for these loans at the start of their activity: to acquire new premises, to equip themselves with infrastructure, to finance R&D or to recruit a team.

To obtain a bank loan as a startup, there are many guarantees to consider. The level of equity, the financial background of the project owner, as well as additional guarantees among others. 

It is also important to know that only traditional credit banks offer loans. To obtain a bank loan, it is necessary to be vigilant on the sum requested, the profiles of the establishments or the conditions requested by the banks. 

There are also different types of loans. Read below to find out more.

The business loan

The professional loan or credit is a financing loan granted by a bank to a company or professional, especially to young companies or start-ups .

Business loans require a number of criteria to prove the feasibility and profitability of the project.

The bank loan

A bank loan is a loan that is repayable after a certain period of time, according to certain monthly payments and conditions set by the bank.

For a long time, bank loans have been quite attractive for young professionals, as they are less restrictive than traditional loans. 

A bank loan generally extends over a period of 2 to 7 years. Its application requires the project leader to provide guarantees or a personal surety. 

Why is it increasingly difficult for start-ups to get bank loans? 

By definition, starting a business is associated with a high risk. With the statistics of one out of two start-ups succeeding, and only 30% reaching profitability, banks are obviously quite cautious. 

A less favorable environment for loans

The economic context of recent years has had a direct impact on the ease with which banks lend to start-ups. 

Obtaining your loan is directly linked to the credibility of your project, as well as your ability to demonstrate its feasibility and prove your experience. 

However, the numerous crises that have marked the last few years (financial, but also health and political), have had a significant impact on the various markets and, in fact, on the ability of companies to meet their debts. 

This has de facto led to a growing reluctance among bankers to grant loans. 

You will be expected to provide more collateral than in the past, and the amounts and rates may be less favorable than they would have been a few years ago.

The end of typical start-up profiles

Moreover, the profile of companies that are born today does not necessarily correspond to the "typical profile" that bankers were used to in previous decades. 

A lack of insight into new growth sectors has led to the emergence of new KPIs that were not necessarily part of the banks' standards. 

Your banker may have difficulty understanding your business. understanding your businessIf your business is innovative, your banker will be more reluctant to grant you a bank loan .

The need for impeccable KPIs

To face the risk, bankers require that your start-up fulfills a certain number of criteria, also called Key Performance Indicators (KPI). These success indicators allow the banker to evaluate a set of parameters that constitute your business and your plan for the next few years. 

For example, we will look at your cash flow and liquidity ratios, your break-even point, your repayment capacity or your projected cash flow plan. 

Putting together a file that meets the expectations of the banks requires a great deal of preparation upstream. 

What are the advantages and disadvantages of bank loans for start-ups?

Benefits

The bank loan still has advantages, such as its non-dilutive nature. This is important for the project owner and allows him to keep control over his activities, unlike fundraising for example.

In addition, the bank loan allows you to benefit from tax deductions, as the repayment of the capital and interest is considered a business expense . 

Disadvantages 

On the disadvantage side, bank loans require a significant preparation for the constitution of a file. This requires a lot of energy for the project owner. A lot of information is necessary to make the project credible in order to convince the banker. 

The bank loan is very cumbersome administratively, inflexible and therefore complicated to obtain. If the loan is obtained, it also requires a commitment over a number of years, with a high nominal rate relative to the duration of the loan. 

Also, the bank loan often requires a personal capital contribution . It varies according to your profile (age, past experience, among others) and is systematically required because it demonstrates the personal motivation of the project owner. 

Finally, the bank loan is dependent on the macro-economic context of the country in which it is exercised. In this case, 2023 suggests a macro-economic crisis, already pushing the bank loan to see its interest rates gradually approaching the usury rate.

What are the alternatives to bank loans for start-ups?

The difficulty and heaviness of the bank loan process are no longer in question. During the creation or development phase of your company, you need a great flexibility in the release of funds.

Aware of these issues, more and more players are looking at the subject of start-up financing, and trying to facilitate the process from start to finish.

Business Angels 

Business angels are private and individual investors who represent an important lever in project start-up financing. 

Business angels also have the advantage of offering support during the development of the project, in addition to financial support and access to a professional network. 

Revenue-Based Financing (RBF)

Among the interesting alternatives that have been developed in recent years by the financing industry is, of course, Revenue-Based Financing (RBF). This innovative financing offer has become a real alternative to bank loans.

Most often used for e-commerce or SaaS companies, RBF is a near-instant financing solution. It allows start-ups to meet their immediate cash flow needs in order to improve their growth. 

The RBF is based on the company's future revenues. It is now an excellent alternative to bank loans. The good news is that it happens to be accessible to a very large number of companies. 

Start-ups, why opt for Revenue Based Financing?

The RBF has many advantages compared to the bank loan. Among other things, it does not require the study of profitability criteria or the existence of exponential growth forecasts.

An easier file to compile

The constitution of the file differs from that of the bank loan. It is not required to carry out an important market study to differentiate its project. 

A key element of FBR is that you do not have to provide any personal guarantees . At Karmen, for example, eligibility for the FBR solution is based on your ability to increase your income sufficiently. This is to cover loan payments as well as operating expenses.  

A loan based on future income

FBR is based on the future revenues of your business. This means that the amount of money allocated depends on the performance of your business. 

For example, if your sales drop in a certain month, the royalties will be reduced. Conversely, if your sales increase the following month, the amount to be repaid will increase.

Easy and fast to set up, Karmen offers a financing solution within 48 hours of your request. If you'd like to learn more about your eligibility for the solution, click here. 

Conclusion

In general, if your project is very well prepared, coherent and supported by competent and experienced profiles, your chances of obtaining bank financing are relatively good.

However, accessing financing today requires careful consideration of the conditions that best suit you. Not all types of financing are suitable for all types of businesses.

Today there is a diversification sources of financing. These are more flexible and rapid for companies, and take into account the risks and variables of the market. The RBF is a real alternative for many companies.