3 Reasons A Bank Won’t Fund Your Startup
So, very many young Nigerians who have innovative, quality ideas just cannot find the required capital to convert the idea in their heads into a thriving business.
The banks, that everyone knows has the money, just wouldn’t help. They have been castigated for it but they too have refused to budge.
Bounce News had a chat with a senior bank executive who participates in making some debt deployment decisions.
He was asked why the banks have refused to be an option for startup funding. Here are three reasons he gave, but on the condition of anonymity.
1. Banks Don’t Take Equity Risks:
Every financial service provider assumes some kinds of risks.
To lend money to Ekene who imports fashion items at Oluwole is a type of risk, and to give money to Michael who just left school and has developed a technology solution, to market is another type of risk.
According to our source, the banks are more wired to lend Ekene money to do his importation than to give money to Michael to market his IT solution, even though Michael’s business may prove more profitable in the long run.
“You need to understand the banks’ role. Banks don’t take equity risks. They take debt risks. What this means is that a bank expects a business to have its own capital.
“The equity risk means that if the business fails, the loss is absorbed by shareholders and that is not what banks are meant to do,” he said.
According to him, if the banks were to even do that at all, “the interest rate that they charge would be much higher because the rate must match the risks”.
2. Banks Don't Want To Risk Regulatory Sanction:
As you may already know, banks are highly regulated by what is called monetary authorities, in this instance, the Central Bank of Nigeria.
In the first place, it was the CBN who has granted the a licence to operate as a bank. Their operations must in accordance with their regulatory provisions.
If they had to engage in a transaction outside their regular mandate, they would seek and obtain permission from CBN.
If they don’t, they risk severe sanctions including losing their operating licence.
So many banks consider investing in a startup not too attractive enough to try to risk CBN sanction or take the trouble of seeking and obtaining the required approval.
This is what our source said: “The bank’s role is credit – lending money. If the banks must take equity risks (invest in new business), then the bank must make investment into the business.
“In order words, the bank is taking risks with the entrepreneur and the high return or loss that will come to the shareholders, it will benefit from.
“But for a bank to even make that investment, the CBN must approve. And that is after you have convinced the CBN why you must make that investment. This is a route most banks would rather not follow.”
3. They Don’t Want To Risk Non-Performing Loans:
Non-Performing Loan is in sum, a debt gone bad. The debtor can neither repay the loan or pay interest.
Let’s take this scenario. Let’s assume that a bank fancies your idea and wants to take an equity risk.
There is one option available to it. The bank can sit down with you and say, “we can see that you do not have enough capital, so we will invest some money, but we will call it debt”.
So, in the bank’s book, it is debt but in reality, the risk is equity. You and the bank would then agree on equity shareholding. That looks smart.
But what the bank has done is that it has mismatched the return it can get from that money against the risks. The most likely outcome is that the bank will have very serious Non-Performing Loan problem.
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“This is because you are taking a risk with someone who hasn’t done a business before. You are taking a risk on a fresh business and business model. And don’t forget, this is depositors’ money.
"The shareholders’ part is bad enough, but the worst part is that it is the depositors’ money. If you are a bank, you need to take the level of risks that generate returns and safeguard depositors’ money,” the source said.
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