Why Your Startup May Never Get Funding From A Bank
It does not matter how innovative your idea may be. Banks just won’t give you money for your startup. This is because banks are not wired to take that kind of risk. This was the view of a top bank executive who spoke to Bounce News on a condition of anonymity.
“You need to understand the bank’s role. Bank don’t take equity risks. They take debt risks. What this means is that a bank expects a business to have its own capital,” he said, while explaining access to capital from banking sector isn’t just an option.
“The equity risk means that if the business fails, that risks is meant for shareholders and that is not what banks are meant to do. If the banks were to do that, the interest rate that they charge would be much higher because the rate must match the risks,” he said.
According to him, “The guys who take equity risk are the private equities, PEs and venture capitals, VCs. That is their job. So, if someone says I am starting a business, I have no track record, but I think this is an innovative idea that no one has done it before, the banks just won’t fund it.
"This is because, that is not what they are designed to fund. The right place to go would be the PEs or VCs.”
He further explained that the bank’s role is credit and that if the banks must take equity risks, then the banks must make investment into the business.
“In order words, the bank is taking risks with you and the high return that will come to the shareholder, it will benefit from it. And for a bank to even make an investment, the CBN must approve. And that is after it has convinced the CBN why it must make that investment,” he explained.
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