Banking on a Startup loan?

Banking on a Startup loan?
web application assessment
Image by bootload
Published at and…

"… What do people think about NAB’s young entrepreneur program? …" [0]

Would you think of using a Bank as a source of credit for your Startup? This idea surfaced recently on the Silicon Beach Startup[1] newsgroup. Why?

Why is this question being asked?
Funding for Startups is a hard problem. The task of securing funding involves both time and effort. A distraction from the task of creating. Why is raising capital so difficult? One word, risk. New companies without a financial track record are unknown quantities. Avoided by all except for the most adventurous of lenders. [2] First-time finance is to Startups what drink-driving is to newly licensed drivers, trouble. [3] For inexperienced Entrepreneurs, even searching for funding is an alien skill. New Startup founders show about as much skill in hunting for finance as 21st century man suddenly thrust back into early Africa. Hungry for food, they sometimes see prey, but have no idea how to trap and kill it, let alone know how to look for spoor. A Bank loan may look like an easy kill. But inexperience has it’s downside where knowledge means survival. A lack of the right kind of knowledge can mean a quick financial death.

Harsh financial environment
Founders also have to contend with harsh environments a partial product of local conditions. Geographic location, culture and business climate all play their part defining the quality and sophistication of funding. If you happen to be lucky enough to live in the Amazon Jungle equivalent of finance, Silicon Valley, finance is difficult, but the money is there. If you live in Australia, the financial equivalent of a desert, finance is almost impossible because money is scarce. [4] So the act of questioning all potential sources of finance strikes to the heart of the local funding problem. Asking the question, "What do people think about NAB’s young entrepreneur program?" makes absolute sense.

Why are Banks lending now?
"… NAB’s Microenterprise Loan
for Start Ups – Learn more about
a Melbourne Florist whose business
is blossoming with the help of
a NAB’s Microenterprise Loan …" [5]

The real reason I think Banks are targeting non conventional companies right now has less to do with "social justice" [6] than traditional higher yield customers shedding debt. [7] Debt is now a four letter dirty word in business circles and Banks know it. Banks still have to invest money and small business at the moment, with its lower finance requirements are probably the only types of companies that might show promise of growth. With growth, profits may follow. What is a Startup? Startups come in many different shapes and sizes, are they all the same? What kind of Startup are we talking about?

What kind of Startup?
The idea to "start up" a traditional small business say a hair dresser, a book keeping firm or newsagent is not the same as "Starting up" a new technology based company like Google did or Scribd is in the process of doing. [8] The definition of a Startup for someone not working in technology appears to be a woolly interchangeable label applied to any entrepreneurial or small business activity. By contrast, technology Startups are made up of two essential ingredients, new ideas and technology with the caveat of smart people working at the core. What makes technology Startups different and so appealing is the idea that not all Startups are born equal. Not all Startups are born equal because small teams of smart engineers, can aggressively attack hard problems to create new technologies, productively. Technology Startups have the advantages of leverage and barriers of entry, that traditional small business can never emulate. [9]

When Corporations shed staff and shrinking economies weed out financially weak businesses, more people are exposed to the idea of combining new ideas, risk and effort for profit. Creating wealth at the forefront in peoples mind. But the language used to describe the mechanism to create wealth is still playing catch-up. How do Banks describe such activity? Banks like to use loosly defined, catchy words like "Young Entrepreneur", "Start Ups", [10] "Micro Enterprise" and pepper their documents with terms like ENYA. [11] But don’t be fooled by the MBA-speak. Indecipherable terms describing what is really a simple set of ideas.

How not to fund Startups
So lets get back to the problem of Entrepreneur funding and Startups. I’m not going to explore "How to fund Startups" because the existence proof has already been written up. It also comes with the added benefit of dozens of "guinea pig" technology companies field testing these financial hacks, real-time. [12] I’m more interested in why "taking money from a Bank is not the best way to fund your Startup". To illustrate this idea, I went through the documents supplied by the Bank [13] and conducted a quick "thought experiment" into the potential dangers you might face.

The three Amigos of funding
In this "fictional scenario", you the founder are put into a room with three potential suppliers of finance. You have to decide which is the best source of finance for your Startup. For the lender, the job is to determine the risk to return ratio. Are you worth it? Lets start. First there’s John, formally dressed and business-like. A representative from the local "Big" Bank. Next is "Fat Tony" the local "loan shark". Immaculately turned out in an expensive foreign suit. [14] Finally Joel, a successful technologist turned Angel Investor. Casual in both dress and manner.

John breaks the ice…

JOHN "So I hear you are interested in the ‘Microenterprise Loan for Start Ups’ our Bank is offering?"

FOUNDER "Yep. Funding is so hard to do. Where do you start?"

JOHN "Lets go through the steps required. Are you eligible for ‘ENYA’?"

FOUNDER "That Celtic singer my mum listens to in the car?"

JOHN "No, the ‘Enterprise Network for Young Australians’?"

FOUNDER "’Shite… thinking to self, ‘MBA speak’. Danger Will Robinson… Danger!"

JOHN "Tell me about your ‘Microenterprise’. Do you know Where your customers come from? Who they are?"

FOUNDER "Yes, no idea."

JOHN "Do you have a reliable and steady income stream?"

FOUNDER "Ramen profitable just this week."

JOHN "Ramen profitable? Is that a global economic indicator like the McDonalds Index?"

At this time both Fat Tony and Joel have been silent. Then Tony pipes up…

FAT TONY "Suit-boy over there is going to… how shall we say, ‘compromise your dignity’, filling out forms and jumping through unnecessary layers of bureaucratic hoops."

FOUNDER "Forms, hoops… compromise?"

FAT TONY "We on the other hand at the ‘Legitimate Businessman’s Social Club’ have less formal requirements. No forms, just a quick shake of the hand and a big bag of cash. We pride ourselves in only getting involved in your business if you fail…"

Fat Tony pauses for dramatic effect…

FOUNDER "What? Broken knee-caps, knuckle dusters?"

FAT TONY "No. We are strictly legit. We do everything a Bank does – take all your worldly good and possessions, but over a short-black and some Penne al’arrabiata." [15]

FAT TONY "John and the ‘Big Bank boys’ on the other hand want you to self assess, be Australian, young and take a minimum of 5 monkeys up to 20G’s. Wait there’s more, not to be a bankrupt"

Becoming increasingly annoyed, John replies…

JOHN "Hang on Anthony. To be absolutely correct, that’s only stage one of four. First you have to talk to ENYA, devise a business plan in conjunction with our fully trained business advisors.

FAT TONY "… and listen to their advertisers, I mean advisors for 12 months."

JOHN "Every thing hinges on the business plan and any support issues we identify. You cannot progress to the ‘Loan assessment interview’ until we have the plan and support letter."

FOUNDER "You mean there’s more? … just for 20 gorillas?"

JOHN "The terms are pretty generous. An unsecured loan from as little as 0 up to ,000. An interest rate of around 9.95%, a three year repayment period and 90 days interest free."

FOUNDER "The interest rates are pretty high. Can I spend it as I see fit? Can I get Guitar Hero for the team? What if I fail?"

JOHN "Thats why we pre-screen you. You have to follow the process. Most of it’s online but…"

FOUNDER "So I have to waste my time with some crappy online application, then attend meetings?"

JOHN "No ENYA, no business plan, no support letter, NO Finance."

FOUNDER "But that will take too long. I need to build the product now. Not next week, month"

JOHN "The process will take some time to approve."

FOUNDER "What? Do any of you blokes create, code?"

JOHN "IT? no we outsource all that kind of typing stuff. Bottom line and all that…"

Pregnant Pause as the reality sets in…

FAT TONY "Tell ’em about the interview John. Tell ’em about what happens if the founders don’t meet the conditions you’ll roll them over to a business loan…"

JOHN "Well there is the final hurdle to make sure your not getting into a worse position. You are taking out a loan. We need to ensure, check, access, confirm, search. We have to be careful and do our due diligence."

FOUNDER "So let me get this right. I have to assess myself, go through ENYA, business plan, go through a loan assessment and all I get is access to a lousy business loan from a Bank?"

Fat Tony "Johnny. It’s a pity you didn’t do you the same due-diligence on all those housing loans."

John "Look who’s talking. I see your business associates taking a hit."

FAT TONY "A Hit?… You and your firm thinking on taking a contract out on me?"


Some time later the ambulance leaves with John. Fat Tony is speaking to the local Police. Joel speaks for the first time.

JOEL "How about if I make you an offer over some coffee. You’ve been recommended by colleague at ‘The HIVE’. [16] I’ve use your App. It’s the best in the market. I’ve seen the changes you made with user feedback. Growth looks good."

FOUNDER "You mean no ENYA, no MBA speak. I don’t have to eat meatballs at the Social club on Wednesdays?"

JOEL "I’ve been where your going before. Are you ‘ramen profitable’ yet? I’m a hacker/founder made good. I mostly do strategic investments, Angel stuff. Even though the market has crashed I’m still on the lookout for Startups that have potential and are starting to make money. [17] Shhh."

FOUNDER "Mums the word."

Back to reality
Letting a Bank evaluate your idea, bash out a business plan and then audit your finances might be financially prudent from the Banks point of view. But predefined strategies like business plans hinder Startups more than they help. Time bound, rigid processes punish fast moving Startups, crippling the advantages they have over normal business. [18] Startups need flexibility. Is it really worth your time to be told you by a Bank, you are too young or too old? That your business plan needs working on? Only to be offered a business loan if you fail to meet their set criteria?

Startups have different financial needs
Do you expect Banks to understand that the idea you propose is a question, not a business plan? A starting point that evolves over time from listening carefully to what customers want and willing to pay for? Limited funding opportunities and the lack of Angel investors who understand and fund technology, hamper local Startups. But short of uprooting to Silicon Valley, the most sophisticated funding environment in the Startup world, the best Startup financial hack is still to build a demo, release it informally to users and continually modifying your product to make what users want… and will pay for. Then hit the local Startup events with your demo. Tell by showing.

Ramen profitable?
Are you "Ramen profitable" yet? If not, get "ramen profitable" fast. Be frugal. If you can get away without borrowing funds, all the better. If you can’t, find alternative sources of finance. [20] If your idea flops, or if you can’t make any money or simply fail, you avoid serious debt. Avoid debt. [21] Especially at a time where the costs to execute an idea and informally introduce it a community of users are at an all time low. Needing money from anybody other than your customers also weakens your position as an Entrepreneur in future negotiations. And it’s not like Banks are currently the best at evaluating financial risk.

Just think sub-prime.


[0] Silicon Beach Australia, "An online discussion list to ‘create a more unified supportive Australian Information, Communications and Technology sector.’

[1] Elias Bizannes, "Is 20k from NAB a good idea?", Silicon Beach Australia.

[Accessed Wednesday, 21 January 2009]

[2] Banks requesting Startups to demonstrate financial stability pretty much kills any idea of investment to Startups. The risk of not knowing if the original loan can be repaid is simply to great. This didn’t stop Banks lending 100% finance to home owners on the assurance they have a mortgage on properties. Even if the property is over valued. For this reason alone I think the current risk analysis industry is to some degree broken.

[3] Dave McClure, "Great Entrepreneurs are PASSIONATE about Customers & Products, NOT about being Great Entrepreneurs", I got this idea from Dave McClure where he talks about first time Entrepreneurs: "first-time entrepreneurs are just as friggin’ dangerous as drunk teenagers behind the wheel of a speeding automobile". The description is apt.
[Accessed Wednesday, 4 February 2009]

[4] The funding pipeline for Startups in Australia is much less understood and clearly defined than Silicon Valley. Thats why events like, "The Hive", and "Silicon Beach Australia", are so important. They act as a ground up movement to funding as apposed to top-down "The Churchill Club",

[5] I was worried that I was confusing the term, "Entrepreneur" with "Startups" but I found reference to the term on the Banks own site. So I think I’m on the right track. Here is an example of the NAB (National Australian Bank) using the term, "Startup", And another example while randomly reading up on US based small business classes In the images, notice the misapplication of business terms.

[6] NAB (National Australia Bank), "Young Entrepreneurs", "… NAB’s partnership with ENYA is recognition that an organisation which supports and promotes the active participation of young people in enterprises is the best way to reach young entrepreneurs. …" is The NAB claim but read in conjunction with "… NAB’s partnership with ENYA is recognition that an organisation which supports and promotes the active participation of young people in enterprises is the best way to reach young entrepreneurs. …" it reads more like marketing.

a) NAB , Young Entrepreneurs

[Accessed Wednesday, 4 February 2009]

b) NAB MicroEnterprise Loans, Young Entrepreneurs (18-29 Years)

[Accessed Wednesday, 4 February 2009]

[7] ABC News, "Figures show Australians continue to shed debt"

[Accessed Tuesday 20 January, 2009]

[8] The greatest source of confusion is the use of the term Startup in what is two entirely unrelated fields. To label a dog-washing firm a Startup might be technically correct but it misses the point. The greatest gains are made by technology Startups because of the way new technology is adopted. Not because of some arbitrary label. Another source of confusion I see is non technology Startups mimicking every Google business practice in the hope they will somehow replicate Google’s growth. Google is far past it’s Startup stage but Scribd shows the type of growth possible in technology Startups. TechCrunch, Erick Schonfeld, "Scribd Had A Blowout Year, And So Did the Web Document",

[Accessed Tuesday 3, February, 2009]

[9] Technical Startups have better leverage than small business because they create new technology. The leverage comes from lots of people using the technology. Business not creating new technology miss out on this leverage and the wealth it generates. A good article to read (and one I re-read) to help explain the relationships between Software Startups, small teams, hard problems and wealth can be found in "How to Create Wealth" by Paul Graham. Read the section on "Technology = Leverage".

[Accessed Thursday 22, January 2009]

[10] I was worried that I was confusing the term, "Entrepreneur" with "Startups" but I found reference to the term on the Banks own site. So I think I’m on the right track. Here is an example of the [Big Bank] using the term, Startup. Here is another example I found randomly searching for US based small business classes Notice the confusion of business terms.

[11] ENYA stands for ‘Enterprise Network for Young Australians’. It’s also a name for a Celtic singer



[Accessed Tuesday 20 January, 2009]

[12] Paul Graham, a) "The Hackers guide to Investors" and b)"How to fund a Startup". Both articles provide ample evidence on how best to fund your Startup. The only complaint is the location bias. If you are not in Silicon Valley your chances of funding are reduced. However a word of caution. The ideas suggested are not a perfect solution to funding but more of a clever-financial hack. Like all hacks they are subject to failure. The experiment is still underway and funding results may change in the recession market. In fact the latest change to c) "Make something users want" is "… to pay for".

a) "The Hackers guide to Investors"

b) "How to fund a Startup"

c) "Paul Graham, YCombinator recommends Startups make something people want… to pay for"

[Accessed Tuesday 3, February, 2009]

[13] I downloaded and went through the following documents:

a) NAB MicroEnterprise Loans, Young Entrepreneurs, Ibid.

b) NAB Terms and conditions (PDF, 332kb)

c) NAB’s minimum requirements for a business plan (PDF, 256kb)

d) NAB Microenterprise Loan Application Form (PDF, 249kb)

[14] Fat Tony, "Fat Tony is know by various aliases as William ‘Fat Tony’ Williams or Anthony ‘Fat Tony’ D’Amico, even Marion."
[Accessed Thursday 22, January 2009]

[15] BBC Food, Penne al’arrabiata, "Penne al’arrabiata ia pasta with a tomato and chilli sauce"

[Accessed Thursday 22, January 2009]

[16] Events such as "The Hive" Ibid. and online resources such as "Silicon Beach Australia" Ibid. allow informal introductions than attending more formal VC/Angel events such as "The Churchill Club", Ibid.

[17] "Ramen profitability" is the ability to (barely) cover living expenses from your Startup revenue. The idea is a play on the idea of spending so little you eat nothing but "Ramen Noodles". The idea was originally described by Paul Graham in "A fundraising Survival Guide",
[Accessed Tuesday, 3 February, 2009]

[18] New York Times, "Claire Cain Miller & Brad Stone" "Angels Flee From Tech Start-Ups"
[Accessed Wednesday, 4 February, 2009]

[19] Rigid processes punish fast moving Startups, crippling advantages they have over normal business because they restrict speed and flexibility, ie: the ability to create new technology by working in small fast teams on hard problems and profit levering new technology.

[20] Paul Graham, "How to fund a Startup", Ibid.

[21] You might be able to do this working on an obscure idea but if you are in a race to build something where the idea is already in the public domain, your competitors might accelerate past you with the aid of funding.