By Rick Spence, National Post, June 11, 2012
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‘Where is the money for startups?” asked Calgary entrepreneur and business coach Devesh Dwivedi as he kicked off a street-level financing forum last week hosted by Startup Canada and Calgary Economic Development.
While the session started with one entrepreneur castigating the banks, the overall theme from the financiers and business owners on the panel took a different tone. Like it or not, it is entrepreneurs who must adapt to the needs of lenders and investors, not the other way around.
The two-solitudes tone was set early. The owner of a consumer services business complained to panelist Harold Fast, a business-development executive with the Business Development Bank of Canada, about the difficulty of getting bank funds — or for that matter, finding a business account that doesn’t cost $30 a month.
“People come in and say, ‘I’m tired of putting in my own money [into their business]. It’s your obligation to lend me money.’” Noting that the key to tapping bank funds is a strong personal credit record, he said entrepreneurs should “come to the bank with the full expectation that you have to put skin in the game, you have to put money in.”
Banks lend only to businesses that are already performing, Fast said. “When you get a loan, your first interest payment is due in 30 days. You have to be that close to making a profit.”
Fast says early in his career at a chartered bank he learned “the bank only participates on the downside.” Entrepreneurs’ glowing growth projections mean little to the banks, who just want their capital back, plus interest. Since they have no stake in the company’s growth, their concern must focus on the risk.
Panelist Gary Ziegler, founder and chief executive of fast-rising Calgary e-commerce company eThor, was sympathetic, but not much more helpful. “I understand your frustration,” he told the questioner. “I got my first money from BDC. It was a very long process. I was spending so much time there that at one point there was a suggestion I should get an office there.” But he’s not blaming the BDC — no other bank would lend him a dime. “Usually they ask you, ‘Got a house? If not, beat it.’”
He warned the 100 startup entrepreneurs in the audience that bankers aren’t looking to make friends: “Lenders will tell you, ‘I want to know that if this [business] fails, you’ll be bankrupt. I want to know that you will do everything you can to make this a success.”
Once on board, Ziegler says, BDC proved a valuable ally, free with business advice and introductions to reliable consultants and other resources. The good news is, he said, as his company became more successful, raising money has become easier. In March, eThor was named “most innovative startup on the planet” at a Silicon Valley technology symposium for its mobile POS platforms for retailers.
Representing private capital, panelist Henry Kutarna of AB Deal Generator had two suggestions for cash-strapped startups not ready for prime rate. If angel investors aren’t willing to fund your startup, he said, some may be willing to finance your receivables, a service known as factoring. And he noted some banks have created special teams to serve knowledge-based companies, claiming they’re more sensitive than the average banker to the needs of growth firms whose best assets are intellectual.
Asked what criteria banks require, BDC’s Fast again proved this isn’t rocket science. “You need to have your financial reporting in order, even if it’s just a P&L. It’s important to keep track of things.” He often asks clients to do a month-by-month cash-flow forecast, to make sure they understand how the cash will flow in and out of their business. As well, “make sure you can speak knowledgeably about your business plan,” he said. “Even if someone else wrote it, you should be able to give me the gist of it.”
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