5 Reasons Not to Apply for a Bank Loan | Fora Financial Blog
5 Reasons Not to Apply for a Bank Loan
June 22, 2018

5 Reasons Not to Apply for a Bank Loan

As a business owner, you understand how critical financing can be during the early stages of starting and growing your business. Unless you’re able to raise capital from other sources, you’ll likely require a loan to keep operations going or purchase assets. most banks offer loans to small business owners, you may not qualify, especially if your business is a startup. In fact, according to a recent survey, a mere 36 percent of business owners seeking additional financing received bank loans.

If you’re considering a bank loan, the following considerations may convince you to seek alternative funding sources for your business.

Why You Shouldn’t Apply for a Bank Loan for Your Business:

1. Banks Typically Don’t Lend to Startups

When determining if you’re a potential loan candidate, banks look for the four C’s of credit: capital, collateral, capacity, and character. However, even if you qualify on paper, the bank can turn you away for any number of reasons. Startup loans are considered the riskiest of all loans, and banks are less willing to provide someone financing on a venture that may not be able to fully repay their debts. In addition, if you apply for a bank loan as a startup owner, your personal credit is likely to be scrutinized since your business has no credit of its own.

2. Your Personal Credit Score Will Affect If You Qualify

Most banks require that you have a strong personal credit score to qualify for a loan. By assessing your credit history, banks can gauge how you manage debt. Primarily, they’ll need to see that you’ve made payments on time and have the capacity to take on additional debt. To qualify for most SBA-backed loans, you’ll need excellent business and personal credit scores. Still, while a good credit score won’t guarantee you a loan, a bad score is likely to work against you. Any blemish on your credit report can cause your loan application to be rejected.

3. The Application Process is Slow and Can Be Difficult

The amount of time it takes to go through the loan application process varies, but it typically takes a minimum of 60 to 90 days. The process can be demanding, as you’ll need to provide both personal and business background information, details of your previous business experience, and your credit history. If you apply for a bank loan, you’ll need to take the additional step of making sure your business plan is sufficient to address all the questions and concerns the lender may have. Specifically, you’ll likely be asked to provide detailed financial statements and cash flow projections to justify your loan request and your ability to repay it. You should also be prepared to provide your personal financial statements and tax returns to indicate your strength as a borrower.

Although other types of lenders will ask for similar information, it’s usually a quicker process, and you’ll receive your approval status sooner. If you require immediate financing, applying for a bank loan might not be your best option.

4. You’ll Need to Submit Substantial Collateral

When applying for a bank loan, you’ll likely have to submit collateral to secure the financing. Collateral can be real estate, equipment, inventory, and anything else that has the value of the loan you’ve received. Submitting collateral can be risky, because if you can’t repay your loan, the bank will be able to seize the collateral. Without this collateral, your business could be put in jeopardy. If you’re concerned about this, we suggest applying for an unsecured business loan through an alternative lender instead.

5. Your Business Could Be in An Excluded Industry

Even if you meet all the necessary requirements, certain industries aren’t illegible for bank loans. This can make receiving additional financing challenging, and you’ll be forced to pursue other options

While traditional bank loans can be an effective source of financing for many small business owners, they aren’t right for everyone. Before starting the long process of applying for a bank loan, consider all your options. If you’re like most small business owners, an alternative lending solution may be more appropriate for your needs.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].