Banks are banking on startups as new growth drivers

Updated 2017-10-26 10:31:56 Shanghai Daily

When Zhang Jiangli quit his high-profile job as a senior executive with a top multinational company to turn entrepreneur four years ago, he had little inkling of the kind of obstacles he was likely to face with his startup.

"Entrepreneurial companies need multiple rounds of financing. We lack collaterals while our business cycle of developing calls for flexible financial services. It sets us apart from the traditional companies and banks are hesitant when we approach them for loans," Zhang said.

Zhang, along with four good friends, cofounded Singlera Genomics Inc, a bio-tech company based in California and Shanghai, in 2014.

Singlera Genomics is into precision medicine, focusing on non-invasive genetic testing for early, accurate and informative diagnoses. With cutting-edge proprietary technologies, it has been a darling of the venture capitalists.

"We wanted to transform our fruitful scientific research and achievements into practical technology and deliver tangible benefits to my country and my people," said Zhang, the co-founder and CEO of this fast-growing company.

Earlier this year, Zhang's startup was extended a 60-million-yuan (US.02 million) line of unsecured and guarantee-free credit from Shanghai HuaRui Bank.

The bank, the first local private lender which was set up in 2015, has been exploring the segmented markets to serve the small and micro startup companies that have long struggled to raise money from the industry and financial institutions.

Startup companies, especially those in the biomedical, science and technology sector tend to depend more on equity financing, as the research and development of new technologies and products involves considerable capital investment and are prone to risks, forcing traditional credit bodies to step back.

While previously big lenders were hesitant to extend credit to startups, landing them into the arms of venture capitalists, there has now been a substantial shift in policy thinking among the bankers.

Commercial banks in China are feeling the squeeze in profit margins as interest rates begin to bite, inviting them to transform their business structure.

"There is fierce competition for large and high-quality clients, pushing the traditional market players to seek out small- and micro-companies," Chen Zhong of Cowin Venture, a Chinese angle investor, told Shanghai Daily.

Innovation-driven economy

Moreover, as China strives to become an innovation-driven economy, banks are encouraged to support technology-based small-and-medium enterprises.

In April 2016, ten banks were selected for a pilot program on technology startups as per a guideline issued by the China Banking Regulatory Commission, the Ministry of Science and Technology and the People's Bank of China.

Three banks from Shanghai, namely the SPD Silicon Valley Bank (SSVB), Bank of Shanghai and Shanghai HuaRui Bank were invited for the trial on investment-loan linkage mechanism.

Under the investment-loan linkage deal, banks can now provide financial services to technology and innovative companies in the early stages by making both lending and equity investments.

In the case of Singlera Genomics, Shanghai HuaRui Bank conducted an in-depth study and carried out due diligence to verify the company's business model, its feasibility, core technical value, ability to ensure cash flow and follow-up equity financing capacity before extending loans.

"They (HuaRui Bank) talked to each and every founding partner of our company like a professional venture capitalist," recalls Zhang.

In a press release, the bank said that they were "very impressed with Singlera Genomics's history, its management team and proprietary technologies as well as its aspiration for precision medicine."

"We're pleased to provide this financing to the company as it drives important medical advancements for a large number of patients," it said.

Xie Qiang, vice president and chief risk officer of Shanghai HuaRui Bank, said there was "a lack of specialized banks in the market."

"We stand out by setting differentiated strategy from the very beginning, doing investment-level due diligence and making professional assessment of relevant projects. We are committed to becoming a 'bosom friend' of these startups," Xie said.

Under a strategic framework with the bio-tech innovative company, HuaRui Bank will offer a comprehensive financial service to the company at different developmental stages.

"They will also support us with loans for merger and acquisitions, management buy-back loans and give us guidance for company operations," Zhang said.

Unlike the conventional lending model of traditional banks, Huarui Bank has a very strict post-lending regulatory mechanism to make sure the money is ear-marked for the items set in the contract.

"We have to apply for a loan not exceeding 7 million yuan each time about a month in advance by showing them the procurement contract with detailed information. We are supposed to hand in the relevant invoices and account statement to the bank and they will review these documents before approving the loans," said Wang Hua, a senior finance manager with Singlera Genomics.

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