5 Reasons Not to Apply for a Bank Loan
If you’re considering a bank loan, the following considerations may convince you to seek alternative funding sources 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.
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.