Banks don’t give loans for software development, it is simply too speculative. If the software has not been developed yet how do you know whether anyone will be willing to pay for your product? How do you know what a potential customer is willing to pay? How does the lender even know if you actually know how to program? There are so many hard questions to answer that most banks will simply avoid providing loans for software development altogether.
If you are determined to get a loan to develop software there are a few ways you might be able to convince a bank to lend to you.
1. Get a Signed Contract – If you have a signed contract from a customer this will answer a couple key questions. Now the lender knows that someone is willing to a buy a product, and they know how much they are willing to pay for it. There is still a major question though. How can you prove to the lender that you and your team can successfully overcome the technical challenges and fulfill the contract?
2. Demonstrate a Track Record of Success – Have you completed other software projects? Have you worked with this specific client before? If you can demonstrate that you have been doing this kind of work for 10 years and you have worked with this client on several similar projects, then you might be able to convince the lender that your past success will guarantee your future success on this project.
3. Generate Sufficient Cash Flow from Current Business – If your business is currently profitable and providing sufficient cash flow to cover your loan payments you can probably secure a loan to expand your current business. The bank will want you to use the loan to expand your current, stable business, but if you can use the loan to increase cash flow from your current business, you can then take that excess cash and invest it into your software development project.
If you can get a signed contract from a client you have worked with in the past, or you can generate sufficient cash flow from your current business, you might actually be able to secure a loan for software development. If not, then you should probably start looking for investors who have an appetite for risk.
About the Author: Adam Hoeksema is the Co-Founder of ProjectionHub. ProjectionHub is a web application that helps entrepreneurs create financial projections without the need for a PhD in spreadsheet modeling.