Let’s talk about bank
financing for startups

Round Seed, Series A, MVP, CAC, LTV, MRR, ARPU, cap table, deck, media for equity, warrants, bootstrapping… What our clients value most is that BStartup professionals speak their language and understand the financing needs of startups, different in many cases from traditional companies. The balance sheets and operating accounts of startups and scale ups have differential casuistics and need a very specialized analysis, in addition to a specific risk circuit, with 4 risk analysts dedicated 100% to startups.   BStartup currently has 23 managers dedicated exclusively to this type of clients in the main startup generation centers, plus 15 semi-specialized managers.   We wanted to talk to Josep Lucena, Sandra González and Fernando Angoso, pioneers in Spanish banking for startups and that among its functions is to analyze financing operations for Startups.   So the first question is clear: What financing needs do startups express to you and what solutions do you propose to them?   Josep Lucena, BStartup Team Leader in Barcelona: Startups may have diverse financing needs to drive business growth and maintain healthy finances, so it is important to offer the most attractive and efficient formulas to obtain the necessary resources. Non-dilutive bank financing can be a good ally to maintain a healthy cash flow while the company develops its growth strategies with financing formulas with higher risk appetite and expected returns such as equity capital or Venture Debt. Sandra González, Enterprises Bank Manager BStartup Valencia: Indeed, I would also add that in the case of startups and scaleups, a quick and personalized response from banks is essential. Startups need immediate access to financial resources to be able to scale quickly and not lose market opportunities. Bank debt, given its non-dilutive nature, is always one of the most demanded solutions. In this sense, we can classify them into different products, such as credit lines due to the freedom and flexibility they provide to meet the Working Capital, which in turn can be combined with working capital lines to finance payments (confirming) and collections (factoring). Short-term loans are also among the main financial demands of Startups because of their low cost, compared to Venture Debt, and because it is a solution that allows to stretch the Runway of the company without the need to go to investors. Fernando Angoso, Team Leader BStartup Madrid:   The most suitable products for this type of company are short-term / working capital financing products, which help startups to bridge the gap between payments and collections.   Many of these companies have to meet most of their payments on demand (salaries and suppliers) and collections, depending on the business model, take time to arrive, causing cash flow tensions.   For this financing need, there are several products, depending on the amounts needed and the credit quality of both the startup and its customers, we try to define different financial products we work with and their “momentum”:  

• Credit policy: It is proposed when liquidity needs are low and it is difficult to keep track of revenues and charges because they are small amounts.

 

• Confirming and confirming prompt payment: Multipurpose product for payment to suppliers, providing, depending on the type of confirming, financing to the supplier or to the startup.

 

• Factoring: A very useful product, when there are highly solvent clients and which allows for the possibility of advancing future collections.

 

• Renting: Although we tend to tend more to the short term, this is a solution for financing all types of equipment and machinery. It does not imply a greater debt in the balance sheet or in the cirbe.

 

• Venture Debt: Loan that is granted to projects in expansion phase, which due to the moment in which they are not able to access to a more traditional financing and of significant amounts due to risk. It is a mixed financing vehicle between non-dilutive financing and equity.

 

The time to apply for bank financing

  And the second question we put to our specialists, at what point is a startup ready to apply for bank financing?   Fernando: In general, from a banking point of view, the perfect moment is when the company reaches break even. At that point, the project has demonstrated that it can become profitable and has the capacity to repay the financing it requests.   But we, depending on each startup, can enter into non-dilutive financing at earlier times. The key here will be the available cash. For example, when it has raised the capital that allows it to have sufficient runaway to maintain its activity and fulfill its business plan would be a good time.   In these cases, working capital lines can be considered to finance temporary cash gaps. We will periodically review the evolution of the business plan to assess whether the startup has sufficient liquidity to continue with the business plan and if necessary expand the lines.   Another important aspect to access bank financing is to have a good planning of the totality of the needs and the moment. For example, as we have already mentioned before, a good time to apply for financing is after raising a round of capital; since, at that time, you will have the liquidity to execute your business plan, and the partners have shown that they believe in the project and both things give confidence to our risk analysts specialized in startups.   Sandra: A key indicator is the ability to generate demonstrable minimum sales through taxes, such as VAT, and in turn to contrast this income with the projected BP. This type of evidence provides a solid basis for negotiating with investors or financial institutions.   It is also true that the ideal moment may vary depending on the sector. For example, in the field of education, a startup may consider seeking financing if it has managed to close contracts with educational institutions. In the case of a SaaS business model, a good time would be when it can demonstrate a certain recurrence of users, i.e. a loyal customer base that uses the service on a regular basis, with a reduced churn rate.   Josep: Finally, I would add that foresight is very important. We see that the cases with the highest success rate in the search for financing are found in startups that have developed their financial strategy with a global vision of the financing solutions they will need. To evaluate bank financing, ratios such as financial autonomy are taken into account, that is, the balance between capital and debt, as well as the runway that the company maintains according to the liquidity it maintains and the monthly burnrate. The objective is to assess the ability to maintain the activity in a sustainable way, even without new capital or debt inflows, looking for the company to be able to maintain the proper functioning of the business autonomously in a scenario in which the capital does not accompany the accelerated growth of the startup.