From the idea to the reality: How to access credit to start a business for a young company.

Starting a new business is a complex and at the same time a stimulating choice. The success or failure of an activity depends largely on the starting evaluations and decisions of the initiative.

If today it is easier to create new businesses, the search for new and adequate financing implies knowledge of some fundamental technical-economic and financial aspects, as well as of the market, essential to achieve a satisfactory level of success and rewards efforts, especially for a young new entrant.

Even if each situation represents a case per se, there are some "mandatory" paths to follow in order to transform your "Business Idea" into "Reality".

The approach every potential young agricultural enterprise has to deal with can be synthetically divided into three distinct and consequential moments:

1) "The Idea and the Entrepreneurial Project": constitutes the crucial starting point for the drafting of our project. The idea must be realistic and objective and must be illustrated with all the technical-economic elements to support it.

It is the logical path required to transform an initial idea into a real feasibility element structured to the extent of the company, for which the appropriate sources of financing will be identified.

The Project, on the other hand, clarifies where the future entrepreneur wants to go, helping him to understand what resources could be necessary for its realization.

2) "Business Plan": it is the document that defines and summarizes the business idea, the strategic lines, the objectives and the patrimonial, economic and financial planning of the company, and demonstrates its economic and financial sustainability over a period of 3 -5 years. The Business Plan is a dynamic tool, to be adapted in the light of changes of ideas and objectives. It is a strategic tool to display the project to third parties and convince them about its credibility and reliability.

These are the expected objectives of the Business Plan:

  • Provide fundamental information for starting a business: what and how many economic resources, the need for financial and human resources, the characteristics of the product and the market, competitors, who are the typical customers, etc.
  • Allowing the global vision of the factors that characterize the company (basis for strategic planning)
  • Emphasize the originality of the business idea
  • Verify the interest of potential customers
  • Monitor the achievement of the set objectives
  • Check the consistency between the individual actions indicated, in particular in terms of income-costs and income-expenses ratios
  • Define the structure and legal form
  • Formulate reliable forecasts by simulating the various business development assumptions
  • Serve as a "business card" to present the company to the outer world (potential partners, financiers, banks, customers and suppliers)

The errors to avoid consist in:

not considering exogenous factors, as in the long run they might have a negative impact;

in defining the Business Plan as a market research,

in presenting unlikely data and financial projections (the hypothesized plan must be consistent and in line with business potential) and not to protect the information contained, even if it is still important to safeguard the data entered (confidentiality clause).

The Business Plan becomes effective if filled in according to a principle of transparency, clarity and objectivity.

After the start, it will be necessary to constantly check the progress of the project through strategic control, in order to promptly verify the achievement of the set objectives.

3) "Access to Credit and Sources of Finance": It is necessary for the Entrepreneur to adopt a more "scientific and structured" approach to the banking system, rather than subsidies or provisions.

The traditional sources of financing external and / or supplementary to one's own possibility of self-financing (such as own capital), which can be used for the realization of the entrepreneurial project, through the banking system are represented as follows:

  • Short-term loans: linked to current operations, they provide for reimbursement within the year and include forms such as opening credit, discounting bills, invoices and more.
  • Medium-term loans: used for investments destined to technical fixed assets, with repayment within three / five years and referable to the technical form of unsecured loans.
  • Long-term loans: for real estate investments, they provide for repayment beyond five years and mainly refer to mortgage loans.

When accessing credit for a loan from a credit institution (bank), it is appropriate to carry out a suitable assessment of the type of conditions to be chosen (variable and fixed rate, and type of loan).

The choice must always be traced back to the company's profitability and the characteristics of the intervention to be carried out.

When using a variable rate, predicting the evolution of future rates to understand the evolution of payments is very difficult.

The applicable rate is the direct consequence of three factors:

  1. Risk of the transaction (credit risk)
  2. Market trend (cost of funding)
  3. Bank efficiency (administrative costs and services)

When a subject turns to a credit institution to ask for a loan, from the very beginning the documentation provided for the assessment by the bank must be detailed and complete, with no margin of discretion and in favor of objective indicators, of quantitative, qualitative and behavioral character.

In this way, the bank's assessment (of the possible expected and unexpected loss) becomes specific for each operation and each company.

After the assessment, the bank elaborates a variable, called rating, through which economic and interest rate conditions are identified:  more favorable to the most deserving companies, and a higher cost to the riskiest companies.

The rating is important for the company as it represents the probability of the debtor's insolvency in a predefined time horizon. It therefore represents the measure of the credit risk borne by the bank concerning the debtor customer.

To achieve a favorable rating, the company must have a transparent management structure, know how to transfer its strategies and objectives, have good market prospects and create a relationship of collaboration and mutual trust.