Banks are rock solid investments that can, upon maturity and after prodigious legwork, yield capital appreciation and significant dividend income for investors. Financial institutions make their money through the charging of interest on a variety of loan types, charging various fees for activities like; overdraft ATM transactions and access, checks, and certain types of accounts. But just like all other businesses, banks need to raise capital to get to this point.
Raising capital can be one of the biggest obstacles when starting a bank, but if you understand how to raise capital effectively and track down the right investors, you’ll have a better chance at success. Here are some tips for raising capital through investors that you might find helpful while you’re learning how to start a bank.
Know How Much Capital You Need to Get Started
In order to obtain approval and officially open a bank, you have to raise capital from investors. Federal guidelines require new banks to prove they have sufficient funds to take on the risk of unexpected losses and growth. Until your bank establishes itself as a reputable, established organization, it will be held to these guidelines. (Read more about the guidelines here.)
The specific amount of capital you’ll need depends on your 3-year expected growth identified in your business plan and where your bank will be located. For example, rural banks usually require less capital (sometimes as little as $10 to 15 million) than busy metropolitan banks (upwards of $25 to 35 million or more). As the organizer, you can be responsible for up to 15% of the capital requirement, and the remainder will be sold to shareholders. In order to increase your chances of success with your new bank, you’ll need as many shareholders as you can get — preferably less than 100 but it can be more.
Take the Time to Prepare Financial Projections
Those who obtain sufficient capital are the ones who take the time to strategize and prepare projections for their bank investors. Securing investors for your bank is a hard-won achievement; these people are going to ask difficult questions before they hand their money over, so you need to prepare sufficiently and have financial projections ready before pitching to them. This will take significant time and energy, but doing so will help you easily identify who your best prospects are and how to approach them for funding.
Research Your Options for Potential Investors
After much preparation, you’re ready to pursue promising investment opportunities, but you need to have plenty of secondary options in mind in case your preferred investors reject you or back out later down the line. There are so many types of investors out there to choose from, so there’s no excuse for not having backup options — and you’ll need them, as more often than not, new businesses must speak to hundreds of investors before finding the right one.
Some of your many investment options include:
● Personal funds
● Crowdfunding sites
● Friends and family
● Government programs offering startup capital
● Angel networks
● Business incubators and accelerators
● Startup launch platforms
● Private equity firms on the lookout for new businesses
● Other financial institutions
● Online lending platforms for small businesses
You need to double down on your marketing efforts so investors are more likely to discover you.
Create a Pitch Deck for Your Potential Investors
The effectiveness of a presentation can make or break the success of your new bank. It is beneficial to have a good story deck to help you focus as you deliver your spiel to potential investors. This story deck should highlight the most appealing features of your banking model and be centered around how your business plan meets the goals and interests of your investors. They will only invest money in something they deeply believe in, so keep that in mind as you craft your slides.
You only need around 10 to 15 slides that include brief points on your company, including its target market, first 3-year plan, team members, monetary needs, long-term plans, and milestones. This will give investors a good idea of whether or not your company’s goals are in line with their interests.
Build Your Network of Professionals
Telling your banking business story isn’t the only important aspect of raising capital; you also need to network. As you make connections with people and businesses, your name will grow in familiarity. Consider lending your help to the people you network with. Doing so increases the chances of these companies and individuals returning the favor in the future and providing you with capital.
Seek Out Companies Offering Capital Specifically for Banks
Companies that provide capital within your unique niche are usually your best bet. You shouldn’t stop searching for additional sources of funding, but you should focus your efforts primarily on investors that offer capital for banks. This will make it more likely that you get the money you need, even faster.
Be Prepared for the Unexpected and Stay Persistent
Investors and capital are never a sure thing. Be prepared for the unexpected and always be persistent, keeping your problem-solving cap on when funding falls through. As long as you have an effective presentation ready and know where to look for investors, you’ll eventually find success with your new bank.