Why Banks Do Not Fund Ideas?
Banks are not in the business for funding entrepreneurs with ideas and that is why entrepreneurs get frustrated by banks. Banks fund cash flows against assets.
Here is how it works.
You go to the bank and say:" Bank I need $10,000". The bank says:" Do you have $10,000 in assets to guarantee the loan?"
If the answer is yes, the bank asks the second question:" if the repayment period is 12 months and your monthly repayment is $1,100, can you generate it?" That $1,100 has to be net from operating expenses and tax in free cash flows to pay back the loan. Can you or your business generate it?
If the answer is No, even if you've assets to support the loan, any bank is going to say no to you automatically.
If you write projections that say you can get the cash flows and you do not have the assets against which they can secure the loan, again any bank says NO. That is why you'll hear entrepreneurs saying banks're not funding them.
Here is what i want you to remember:
"Banks'll fund against the assets of your business but they will fund for the cash flows you would generate"
Entrepreneurs, that is so important and you must be aware. That is why a salaried person from a credible institution can easily get a loan compared to an entrepreneur in the banks.
And assets, banks do not look at the total, they look at the net. What banks will say:" are your assets net of your liabilities?" In effect, it is your owner's equity (shareholder's value) left in your business. How much is that? Basically it is how much net assets do you have. (NET ASSETS)
That is what banks will look at. Everything else is gossip. They look at your net asset value(N.A.V). If you're asking $10,000 and your net value in assets is $5,000. That is a big NO. "We can't do it."
Does it make sense?
If you want to deal with banks, get to a position where you create as many assets as possible. As entrepreneurs with ideas and with no assets, stop wasting time to approach banks or expect them to do magic for you.
Banks are for debt financing not equity financing.
Written by Pacifique Ubukombe