Banks are licensed financial institutions that are able to make loans and take deposits, among other services. In developed economies, banks often step in to provide capital to start-ups and SMEs. In emerging markets, however, commercial banks tend to shy away from the SME sector, seeing it as risky and costly. Although, some banks have developed products for SMEs in Africa, the practice has not yet been fully extended to start-ups. Banks that work with SMEs offer various financial products, including asset financing and invoice factoring.
Like other funders, they want to see a comprehensive breakdown of how the funding will be used, several years’ financial history (specifically, consistent cash flows), and they will ask for collateral. This is used to estimate the credit-worthiness of the business, how long to lend the money, and at what interest rate. Banks can be an efficient source of capital, but most will charge high interest rates given the risk associated with SMEs. Make sure you calculate how much you will need to pay every month and consider carefully whether that is something your company can afford. It is important to foster a relationship with the allocated relationship manager in order for them to understand the business early on so you do not wait until there is a pressing need.