New businesses need access to funds, and banks are usually the first place that business owners approach.
But getting a bank loan is not that easy as very few entrepreneurs fit the strict criteria that banks set. While some banks are trying to make it easier for SMEs to get loans, it is generally a lengthy process and will test your patience as you will be required to provide a wad of information.
Here are the pros and cons of approaching a bank for a loan:
THE UPSIDE
1. Familiarity
Most of us have bank accounts and we are accustomed to and comfortable with our bank as our financial institution, so it is natural that we will usually think of this option first when looking for a loan.
There is some comfort to be had in knowing you will be probably be treated fairly by a big institution.
2. Choice
For new business owners and entrepreneurs, the banks have a variety of good loan plans to suit various SME needs. Check carefully – banks make their money from the interest charged on these loans, so make sure you know and understand the repayment terms of the loan plan you choose.
3. No ulterior motives
A bank loan is granted purely for the interest the bank will earn from the loan. Banks will not demand part ownership, decision-making powers, or a share of your profits, leaving you in peace to run your business.
4. Lower interest
Bank loans often have a much lower interest rate than other options like credit cards and last-resort money lenders.
5. Tax advantages
If you get a loan from a bank, your tax charges may reduce because the percentage of profit that is used to repay the loan is exempt from tax.
THE DOWNSIDE
1. It’s Complicated
The mere volume of detail that banks require to consider extending a loan is problematic for many entrepreneurs. The process can be extremely frustrating and time-consuming. Be prepared for a lot of back-and-forth before the loan is granted!
2. Banks prefer to lend to functional businesses
Because it is easier to calculate credit history and profitability, banks give preference to businesses that are established and running. If you are trying to fund a start-up, you are not a preferred client, so be prepared for an uphill battle.
3. The arduous business of qualifying
It is not always possible to live up to the standards that the banks expect in order to qualify you for a loan. Their list of conditions is long and tedious.
Make sure your financials and other relevant documents are as comprehensive as possible.
4. Added Risk
Usually when taking out a bank loan, you need to put up some collateral – like your house! If you do this and run into trouble later, this collateral could potentially be lost. Do not fall into the trap of being so positive about your business prospects that you think this will never happen.
5. It takes so long
The application for a bank loan tends to be a long, drawn-out affair. Banks need to verify every detail, and this can considerably delay the application process. The more information and supporting documents you have, the better, but be prepared for delays.
6. Only a part loan may be granted
It is not uncommon for banks to grant a loan that is just a percentage of the amount requested by the business owner. This can be quite a set-back and you need to think about whether it is worth going through the application process with more than one lender to get the full amount you need.
7. Other options
There are other options out there, including innovative funding solutions. While many small business owners start off their search for funding with their bank, it may be worthwhile to do some research into whether there are easier options which are more applicable to your business, or to your stage of business development.
But be careful – make sure your repayments are sustainable as interest or repayment rates may be higher than those of the banks.
Author: Karl Westvig is the CEO of Retail Capital. The company was established to provide businesses with an alternative funding solution to traditional small business loans.
