The Pitch

Despite the generally gloomy news that the media circulate, all high-street banks are willing to lend money to start-ups. It’s easy to forget that lending money is one of the reasons that they are in business! 

Even though there is money to lend, and a variety of government and bank-led initiatives (such as Funding for Lending, Enterprise Finance Guarantee Scheme, and various industry funds), it’s important to approach the bank in a professional and knowledgeable fashion. Make sure that you fully understand the detail of your business plan, and can answer any questions confidently and consistently.

As a rule of thumb at the time of publishing, banks will typically meet 50 per cent of the funding requirement for a general start-up, and some banks in the franchising sector will extend to 70 per cent for a recognised, established franchise. There are usually arrangement fees in addition to interest, and you must also consider any covenants (restrictions and / or requirements) that might be placed on you whilst the facility is in place. 

For asset purchases, it is often prudent to consider whether the item can be purchased using a lease or a hire purchase agreement, which is itself secured against the asset. There are two types of leases – operating leases and finance leases. They have different accounting treatments and, fundamentally, with an operating lease you are merely ‘renting’ the item, whereas with a finance lease you are ‘purchasing’ the item. Make sure that you get clarity on the type of lease before entering into any commitment. Banks will look for you to consider these arrangements when you are looking to fund a start-up with capital assets, as it spreads the funding risk for them.

Probably the most nerve-wracking part of the whole process of starting a business is pitching the business to funders. Though you must expect your ideas to come under scrutiny, the actual meetings with bank managers or funding organisations will be more relaxed, without the formal pitches, and will be a two-way process. 

There are, however, some ground rules that you must be aware of. Firstly, it is vital that you know your business, and your business plan, inside out. They will expect you to have a grasp on the financials of the business, and to understand exactly what makes money and what the potential warning signs are.

They will also expect transparency and honesty from you. If there is a major weakness in your business, for example a strong competitor or a technological advance that you are not prepared for, you should be honest about this, and explain how you would look to overcome this weakness.

Since the credit crunch, there have been changes in how the banks are set up and how they motivate their teams. There are also more modern banks that purport to have local decision-making authority, and are aimed to help small businesses. In general, though, you would expect the following process: You would meet with a local bank manager; the level of the banker will depend on the plans of the business (banks are often divided into small business, commercial and corporate levels, and the managers in each level are specialists in businesses of that size). Once the plan is prepared and the pitch made, the bank manager will review the plan, suggest amendments and make a proposal to the underwriter, together with a case highlighting their support of the plan. 

This article includes some extracts from The Startup Coach: Teach Yourself.