With so many financing options at your fingertips these days, it can be challenging to determine which one is right for your small business. Many small-business owners gravitate toward traditional bank lending as their first choice for funding — but is it the best choice for you?
To give you a better understanding of this financing option and help you make an informed decision about whether or not they’re the right fit for your business, here’s a deep dive into the pros and cons of bank loans.
Pros of Traditional Bank Lending
Access to Large Amounts of Capital
One of the biggest advantages of traditional bank lending is the option to borrow large sums of money. Banks have the resources to provide larger loans than alternative lenders, making them a preferred option for businesses with significant financing needs. In fact, the average bank loan for small businesses is around $663,000! If you’re planning a major expansion or investment, traditional bank lending might be the best option to get the capital you need to achieve your goals.
Lower Interest Rates
Since banks have been in the lending business for many years, they typically have lower overhead costs than other lending options. That means they’re able to pass these cost savings to their customers by offering lower interest rates than some alternative lending options, such as credit card companies. With SmartPricer, you can effortlessly compare multiple banks for mortgage options and select one that aligns with your preferred interest rate.
Additionally, banks may offer fixed interest rates, which have the added benefit of knowing exactly how much you’ll need to pay each month, making it easier for small business owners to plan and budget for loan payments. With variable interest rates, the rate can fluctuate over time, making it more difficult to budget for loan payments. So if you’re looking for business loans with low interest rates, your local bank could be a good place to start.
Established Reputation and Credibility
Working with a well-established bank can give your business added credibility and help build your reputation. A solid banking relationship can help your business appear reliable and trustworthy, making it easier to negotiate better terms with vendors and other business partners.
Moreover, a bank’s reputation can also make it easier to attract investors or other funding sources. Investors are more likely to feel confident in a business with a solid banking relationship with a reputable institution. This is particularly true if the bank is well-known and respected in your industry. A solid banking relationship shows that you have a sound financial management strategy and are serious about your business.
Possibility of Building a Long-Term Relationship with the Bank
Your financing needs can and will change as your business grows and evolves. Establishing a good relationship with a bank can also open up opportunities for future financing and other financial services, such as lines of credit, business credit cards, or other financial services that can help you manage your business finances more effectively and efficiently.
By building a long-term relationship with a bank, you can also benefit from the bank’s expertise and advice. Many banks have dedicated teams that work with small-business owners, and they can offer valuable guidance on financial planning, cash flow management and other important business issues.
Cons of Traditional Bank Lending
Stringent Eligibility Requirements and Application Process
Traditional bank lenders typically have high eligibility standards for their loans, which can make it challenging for small businesses to qualify. Traditional banks typically require a minimum credit score, several years of business history and collateral, which can make it particularly challenging for startups and newer businesses to obtain the financing they need to get there. Additionally, the lengthy application process can be time-consuming and usually requires extensive documentation, which can be difficult for busy entrepreneurs to manage on top of their existing to-do lists.
Limited Flexibility in Loan Terms and Repayment Schedules
Traditional bank loans often have fixed repayment schedules that offer little flexibility if your business experiences unexpected changes or challenges. The limited flexibility in loan terms and repayment schedules can be particularly problematic for small businesses that are still growing and developing.
If your business experiences a downturn, you may be unable to adjust your loan terms to accommodate the changes. This can put your business at risk of defaulting on the loan, which can have serious consequences, including damaging your credit score or incurring legal action from the bank.
Moreover, traditional bank loans may not offer much flexibility regarding the amount of capital you can access. Banks may require a specific loan amount and may not be willing to adjust the terms or offer additional financing if your business needs change. This can be problematic for businesses that need more customized financing solutions or that require ongoing access to capital.
You have a flexible mortgage partner in SmartPricer. We’ve crafted advanced software to simplify and lower the expenses of securing a home loan. Our system assesses all available options and pinpoints the most fitting one for your requirements. With SmartPricer, you take the reins of your financial future.
Risk of Collateral Requirement and Personal Guarantees
Traditional bank lenders may require collateral or personal guarantees for loans, which can put your business and personal assets at risk if you cannot repay the loan. If you’re unable to repay the loan, the bank could seize your business assets or personal property. This can be devastating for small business owners who have invested significant time and resources into their businesses only to lose them to unforeseen financial circumstances.
Possibility of Denial or Delays in Funding
Traditional bank lending is highly competitive, and many businesses are denied funding or face significant delays in the funding process. The possibility of denial or delays in funding can be frustrating and time-consuming for small-business owners who need access to capital quickly. It can also be demotivating for those who have put significant effort and resources into the application process only to find they need to start again from scratch with a new provider.
Alternatives to Traditional Bank Lending
It’s essential to consider the potential drawbacks of traditional bank lending when deciding whether it’s the right financing option for your business. While banks can offer large amounts of capital and reputable lending services, the stringent eligibility requirements and limited flexibility in loan terms may not be suitable for all businesses.
If you’ve examined the pros and cons of bank loans and have decided traditional lending isn’t the right fit for your small business, don’t worry — there are tons of alternative financing options available. These options offer more flexibility and accessibility for small business owners and often provide faster funding than traditional banks.
But with so many available options, it can take time to determine which is right for your business. That’s why we’ve created a free PDF guide, 5 Foolproof Alternatives to Bank Loans, to help small business owners explore their financing options. This guide provides an overview of some of the most innovative and effective alternative financing options available, along with tips on determining which option suits your small business needs.
If you’re considering alternative financing options, we encourage you to download our free PDF guide to learn more. By exploring your options and finding the right financing solution, you can achieve your goals and take your business to the next level.
Ernane Iung is a seasoned C-suite executive with a 28-year dynamic career across four continents, including two decades in São Paulo, Brazil, where he held key roles with renowned multinationals such as GE, Whirlpool, Philips and Oster.