Startup Loans | When, how and why

If you think that a bank loan could be a funding option for your business, it is important to first analyze what such a short or long-term funding instrument entails, but also what specific needs you would like to finance with it.

In general, banking products are affordable post-startup solutions. "Short term loans or overdrafts are suitable for temporary/urgent needs, while for investments you have short-, medium-, and long-term loans available. However, all banks come with conditions, so they should not be looked at as an investor, it will ask you for a lot of transparency, reports, and require that you meet financial and non-financial conditions", says Vlad Sabău, Head of Financing Products ING Romania, in his material on funding options .   

Depending on the type of your activity and business needs, you can start with smaller, short-term loans for your current needs, and as the business grows, you can turn to banks to fund larger investments with long-term loans. If you want to purchase equipment or expand your production venue, you should turn to investment loans. 

It is not recommended to use short-term loans to finance such efforts, because the pressure on the company's liquidity could prove to be too great. In other words, funding can make the difference between success and failure, which is why the type of funding must be chosen carefully. The golden rule, however, is to never borrow more than you can afford to pay back. 

Questions to answer before contracting a loan  

Like any other funding tool, bank loans come with a number of advantages and disadvantages, which you should analyze before making a decision. Here are some helpful questions in this process:  

How does it help your business? You should get a loan only if the things you will use that money for will make your business grow even more. It is not a good option to get stuck with installments if your business is in trouble, and you want to use the money to cover your debts or you plan to buy a new car. If you resort to a loan to cover a liquidity shortage, then you must make sure that the shortage in question is only temporary or seasonal. 

How much will it cost you? Nothing in life or business is free. The money borrowed from the bank will cost you interest and lending and/or administration fees. If you are lucky, you get to 10% per year that you have to pay on top of the initial amount you have to repay, but keep in mind that there can be significant differences from one bank to another, depending on the startup loan offers. Therefore, we recommend you to visit several banks, the effort might be worth it. The bank should be your partner at all times, not just when you plan to get a loan. For example, in terms of costs, it can help you by offering you accounts with minimal commissions.  

What kind of loan should you take? There are different types of loans: 

Short term loans 

  • are also called working capital loans, being the equivalent of consumer loans.  

  • Advantages: they are usually more easy to get, i.e. fewer documents are required, but the lent amounts are also smaller.  

Loans for investments 

  • Banks are much more rigorous in this case and they can ask you for a much more complex set of documents such as securities (bank or mortgage), documents proving the value of the investment (technical documentation, offers from suppliers) and even a business plan and feasibility studies .  

  • You can talk to your bank if you want to refinance a loan that no longer helps you or to find the right loan for your liquidity level, business status and estimated income.  

Are you eligible for a loan?  

The main objective of banks is to make sure that they will recover the amounts they lend and the costs of the loan. They will therefore grant a loan to a startup based on a file that is usually quite thick and includes various documents which prove the creditor’s "ability to repay". Some documents show that the company is legally set up and has the right to do business - we will call them legal documents, others provide insight into the financial status of the company - we will call them financial documents. 

The main restrictions in contracting a loan are related to the company's age and repayment capacity. Startup loans are still rare in banks' offers. Given that more than half of the newly established companies do not make it past the first year, it is somehow normal for banks to impose a minimum age requirement for the company. For some banks it is one year, others ask for the company to be at least 3-5 years old. The second condition refers to the cash flows needed to repay the loan. Only companies with a positive cash flow are "bankable". That is, the money you collect must cover your payments, including the installments. 

In general, the most important key indicators that banks look at are the company's ability to generate cash to cover its current expenses, its indebtedness, operating profit ratio and return on assets. If the company does not have an operating profit (before depreciation, provisions and taxes) this drops your chances of receiving a loan. 

Moreover, banks automatically exclude from the list of companies that can be credited those that: 

  • Have initiated insolvency proceedings; 

  • Have issued bounced checks and/or had major payment incidents; 

  • Have outstanding payments for more than 90 days for other bank loans; 

  • Have outstanding payments to the state budget; 

  • Are unable to present the company's financial statements; 

  • Have an unstable shareholding structure. 

How can you increase your chances of getting funding? 

A healthy, well-thought-out financial behavior from the very first days of your business is the surest guarantee of success in getting funding from the bank at the right time, whether it is a business loan or other bank financing products. Most start-up businesses fail because they have trouble managing their cash flow. In other words, it is extremely important to be permanently aware of every cent received or spent. Moreover, it is equally important to: 

  • Build a good relationship with your bank. Don't wait until the very last minute to go to the bank and apply for a loan. Your history with the bank is very important, and the fact that the bank knows how your company has evolved during the last few years can make a big difference. Also, carrying out your current operations through the same bank brings not only advantages, but also indirect benefits. The more a company works with a certain bank, the more the credit institution will offer better financing conditions, as it knows the risks of that business up close.  

  • Reinvest your profit. You can finance your big projects from the amounts set aside during the previous years. Reinvesting profits is not only a funding source, but also proves to the bank that the company is not only a source of income for you, but that you are willing to use the earnings to further develop your business.   

  • You think strategically and long-term. A bank will look at the medium and long term strategy and monitor how the entrepreneur manages its suppliers and customers.   

What documents are generally required for loan approval 

  • Memorandum of Incorporation (original version, updated version); 

  • Registration certificate; 

  • Valid certificate of confirmation of company details issued by the Trade Register (not older than 30 days) (it can also be obtained online); 

  • Information regarding the group companies; 

  • Proof of any securities; 

  • Power of attorney from the shareholders for the contracting of a loan; 

  • Other licenses/operating permits, if they are specific to the company’s field of business; 

  • Financial statements submitted to the tax authorities (Balance Sheet/Profit and Loss Statement); 

  • Trial balances submitted to the tax authorities, the latest monthly trial balance; 

  • Cash-flow: cash flow statement (collections vs payments) and forecasts; 

  • Database interrogation agreement (Banking Risk Center - where all payment defaults are registered); 

  • Information about the business: a mini business plan with information about the market, about the main customers and suppliers; 

  • Information about the assets that the company has; 

  • Valuation reports of the collaterals (pledges and mortgages). 

Check your credit alternatives  

It helps to be aware of all the right funding options when you have a business. State-guaranteed loans, such as IMM Invest, are such an option. This program allows SMEs significantly affected by the COVID-19 crisis (and not only) to secure their liquidities for running their current business or for investments, by accessing one or several loans for investments and/or one or more loans /credit lines for working capital, guaranteed by the state, through the Ministry of Public Finance. 

The maximum amount that can be borrowed is RON 10,000,000 for investments and RON 5,000,000 for working capital.  

Read more about the granting conditions and the amounts that can be accessed on the official website. 

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