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richardhutnik on 26 October 2011
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HappySqurriel said:

Actually most small businesses and start-ups DO use banks to get financing; after all a restaurant, farm, small retailer or countless other small firms will never be large enough to attract interest from venture capitalists or be large enough to have an IPO. Certainly entrepreneurial start-ups (like tech companies) which are so vital to economic growth need venture capital because they're too high risk for a bank; but that doesn't mean a bank doesn't play a critical role in the economy.

Beyond this, companies of all sizes use banks to finance their payroll and to pay for their inventory because their costs are fairly constant throughout the year but their revenues are often very seasonal.

On top of this, as much as it goes against the rhetoric, banks actually prevent people from being exploited by those with capital. The most obvious example of this is the realestate market. Since an individual can go out and get a low to buy/build a home or become a land-lord people are not trapped paying exploitative rents to land owners simply because those land owners are the few people with the wealth to be able to purchase real estate.

Have you actually been involved with the process to get funding for a start up?  No, most businesses initially don't use banks to get their intiial start up money.  Banks don't lend.  I can tell you story after story of this not being so. It isn't how it works.  Most money to start comes from a person's own savings, that they do anything.  Once they have an established track record, a bank will then extend them a line of credit.  That is how things work.

http://www.marketing-resources-center.com/small-business-startup-loans.html

Small business startup loans can come in many forms. From government loan programs, to relatives with money to invest, here are 6 sources you might want to consider for financing your business. 

1.Your Own Pockets
Believe it or not, this is the most popular source of startup capital. Don’t have a vault full of cash? Many people mortgage homes or sell property to raise the funds they need. Though it may be high risk, for some it is the fastest, easiest, and most reliable way to raise startup money.

 

This is in keeping with how franchising works.  Look, for example, at what it takes to own a McDonalds:

http://franchises.about.com/od/fastfoo1/fr/mcdonalds.htm

 

How Much does a McDonald's Franchise Cost?

It takes a lot of potatoes to make these fries so come prepared. You will need a minimum of $300,000 in non-borrowed, personal resources to be considered for a franchise. Most Owner/Operators enter the System by purchasing an existing restaurant directly from McDonald’s or from a McDonald's Owner/Operator. A small number of new operators choose to purchase a new facility, but that requires an initial down payment of 40% as opposed to 25% for an existing restaurant. Intensive training addresses all aspects of operating a McDonald's restaurant. While McDonald’s does not offer financing, McDonald’s Owner/Operators have access to the company’s established lender relationships with some of the lowest lending rates in the industry.

Of course, the Small Business Administration will end up intervening to get financing in a number of cases.  But to stand by what I said, there is a simple test.  If anyone here wants to get a business started, try going to a bank with just an idea for a business, and even a business plan, and get funding.  This means you have no collateral either to back up the loan, just an idea.  It isn't going to happen.

With the example of the franchise, you end up with a situation where the company who has the franchise model does the bulk of the work of adding value, and then there is enough there that the bank feels comfortable enough that it will make money of this, so it will lend.  But in this, what exactly does the bank bring to the equation?  Not a lot.