We had a recent post about alternate funding options available to businesses. I looked through the comment section to see some comments about how banks and financial institutions complicate the lending process. Well, this piece today is to tell you that a traditional loan from a bank may not be the best option for your business (depending on what business you have and what stage you are in).
Traditional lending has long been the go-to option for businesses seeking financial support. Banks and credit unions have historically played a pivotal role in fueling economic growth by extending loans to businesses of all sizes. However, in today’s rapidly evolving financial landscape, this traditional lending has limitations and drawbacks.
Lengthy Approval Processes
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One of the most significant drawbacks of traditional lending is the lengthy approval process. Applying for a business loan from a bank or credit union often involves mountains of paperwork, complex documentation requirements, and weeks or even months of waiting. If you are starting a small business and need quick capital infusion, this can be a deal-breaker.
In contrast, alternative financing options such as online lenders and crowdfunding platforms offer quicker approval times, allowing businesses to access funds when needed.
Stringent Credit Requirements
Banks typically have stringent credit requirements, making it difficult for businesses with less-than-perfect credit histories to secure loans. This can be particularly challenging for startups or small businesses still establishing credit profiles. Alternative lenders often use a broader range of criteria to evaluate your loan applicants, thus giving more businesses access to funding opportunities.
Collateral and Personal Guarantees
For many intending businesses or small business owners, this is the one reason to avoid traditional lending. Banks often require borrowers to put up collateral or personal guarantees to secure a loan. This can be a risky proposition for business owners who may have to risk their assets, such as their homes or savings, to obtain funding. Running a business involves some pressure, and having guarantors or collateral involved heightens the stake. Alternative funding options often provide unsecured loans or offer other forms of credit, eliminating the need for collateral and personal guarantees, which can be a more attractive option for many business owners.
Limited Flexibility
Traditional loans typically come with fixed terms and repayment schedules. It is not a pay-when-you-can or pay-when-you-make-a-profit arrangement. When it is time to pay, you must make the payment irrespective of whatever loss you may still be making. While this can provide predictability, it may not suit businesses with fluctuating cash flows or seasonal sales patterns. Alternative funding options often offer more flexibility in terms of repayment, allowing businesses to tailor loan terms to their unique needs.
Innovation and Technology
The world of finance is evolving rapidly, driven by technological advancements. Traditional banks are still lagging in adopting innovative technologies and digital lending platforms. This can result in a not-so-nice user experience for borrowers and slower processing times. Alternative lenders, on the other hand, often leverage cutting-edge technology to streamline the lending process, making it more efficient and convenient for businesses.
Limited Accessibility for Small Businesses
Large banks often prioritize larger businesses when it comes to lending. Small businesses may struggle to access the financing they need from traditional sources. If you doubt it, you can go to the bank for a loan to fund your small business and see how it goes. This can stifle innovation and growth in the small business sector. Many alternative lenders specialize in serving the needs of small businesses, providing them with greater access to funding opportunities.
Conclusion
Traditional lending options will save the day for some businesses, but not all. If you decide to go this route, do your analysis right and be sure that you are in the right kind of business to take it on. You should also be in the right stage of business to be sure that you will not run into uncertainties that would prevent you from repaying the loan. Also, do your calculations and ensure that you have a higher growth rate than the interest rate; otherwise, you might just be setting yourself up to fail.
If, however, you make all your considerations and decide that a bank loan is not for you at the moment, then consider alternative financing options. They are more accessible and flexible and might give you the leverage to push through. Also, the absence of stringent credit requirements or collateral demands places it within your reach. All you need is to have a proven business idea and conduct research as necessary.