Despite being the new wave of players for the economy, startups are the pain point of the traditional corporate banks for several reasons.
Firstly, they lack the track records that traditional credit assessment requires, as their very name “Startups” suggests. When corporate banks consider lending to a company, the first and foremost piece of information they will look at are the financial reports which show how could the company did. Since corporate banks are usually more risk averse given the relatively “cheap” interest rates they charge compared to other financial institutions like venture capitals, they will prefer to bank with customers that have a proven record of profitability to lower the risk of bad debts, as a small portion of bad debts will erode the humble interest income earned from the loans.
Secondly, and not surprisingly, many startups are still finding a way to make money. Credit approvers in the traditional corporate banks will find it difficult to sign off any new facilities to loss-making companies as their repayment abilities are hard to be quantified based on stale information, although there might be the next Google or Facebook among them. As the “future potential” of a company is hardly the major determining factor when assessing whether to grant a loan or not in a corporate bank, which put more emphasis on the track record and profitability, it is not hard to guess even today where many new startups are thriving, the majority of a bank’s loan book is still dominated by those companies that have maintained a close relationship with the bank for a long time.
Another factor which makes a corporate bank hesitate is that startups usually lack tangible asset that could be pledged as security for a loan. Traditional corporate banks usually turn to tangible security to safeguard their exposure to companies, which could be deposits, properties, or assignment of receivables, for example. Among startups, which most of them could be loss making, it is hard to imagine they could summon a sizable load of assets that could be pledged to banks.
As such, the major source of funding nowadays for startups is venture capital or private equity, which are adapted to take up more risk for higher returns but these funding are very picky. Nevertheless, recently traditional corporate banks are beginning to think of various ways to enter into the startups market which the future of the economy hinges on. Some are willing to “craft out” certain portion from their loan book to cater for this “riskier” companies.
Startups which want to look for an additional source of funding may benefit if there exists a platform for them to showcase their profile to potential lenders that are keen to do more business, instead of them going to each bank multiple times to explain themselves. The day may come soon when the voice of startups could be delivered to all banks at once.
By Torres