Should You Go With Traditional Banks for Business Loans? This Might Not Be The Best Idea
We often think of traditional banks when it comes to securing business loans for our small businesses. However, this might not be the right approach. The reality is that getting financing from a regular bank is not really an easy task for a small business. Long queues, long approval times, strict rules, conditional terms, and so on are just a few of the hurdles one has to cross over.
In this day and age when small businesses and startups require flexibility, their business loan terms should also be according to their convenience. Hence why different options such as online financiers, SBA-backed loans, and merchant cash advances are the choice of financing as the more accessible options. Read this article to know more about the issues small business owners may face with their small business loans and how one can overcome these with alternate solutions.
What Are the Challenges Faced While Applying for Business Loans From Traditional Banks
- Long Approval Times
When a startup owner applies for a business loan, they are usually pressed for time. Hence applying for a business loan through a traditional bank can be a time-consuming process. Small business owners are made to run pillar to post to often need to issue a lot of documents such as bank statements, tax filing reports, extensive growth plans, and such. Even after submitting these documents, it can still take weeks or even months to be eligible for a business loan.
And when small businesses are in need of immediate funding, these delays can make or break the business. Small business owners could face delayed payments to their employees, and other missed payments. This is contrary to online financiers who offer small business loans with immediate approvals in as little as 24 to 48 hours, which is all the more reason for small businesses to opt for such lending methods.
- Strict Eligibility Terms
No traditional bank would approve business loans without extensive background checks – sometimes unnecessarily delaying the process. Over the regular documentation, they typically require exceptional credit scores and significant collateral to approve small business loans. Most startups and small businesses in their early stages would not even be eligible when such conditions are put forth, hence failing the process.
For example, a young startup owner may show promise and exceptional growth potential but may lack the collateral and financial history that traditional banks demand. In such a circumstance, the young entrepreneur may turn towards alternative finance solutions such as SBA loans or online lenders to meet their needs.
- Inflexible Business Loan Terms
One other significant drawback when it comes to regular banks and their business loans is the inflexible business loan terms. Since small business owners do not have a regular financial history, traditional banks often set strict terms such as fixed repayment schedules without considering the revenue fluctuations and other fluctuations that small businesses experience.
On the other hand, alternate financiers would often provide flexibility in their business loan terms. Let’s take a merchant cash advance (MCA) for example, which would link the repayment to the business’s daily sales, which would allow them to pay more as they generate more revenue and pay less when the sales are down.
Alternative Options for Small Business Loans
- Online Creditors
Know what’s truly changed with the times? Online creditors/lenders. These online financiers have changed the game for small business owners with their flexible business loan terms. These financiers provide business loans that are both convenient and accessible to most young startups.
These online creditors review applications within minutes and cater to different businesses, even those with average credit scores and insignificant collateral. Although the interest rates of these business loans may be higher than the traditional small business loans, due to quick approvals and the convenience, most small business owners may opt for this.
- SBA Loans
The Small Business Administration (SBA) provides SBA loans, which are partially guaranteed by the federal government. These small business loans are available through approved lenders and offer competitive rates, making them a great alternative to traditional business loans.
SBA loans come with longer repayment terms and lower interest rates, which can make them more manageable for small business owners. However, they still require a thorough application process, so while they are more flexible than traditional bank loans, they may not be the best option for businesses in urgent need of capital.
- Merchant Cash Advances
Merchant cash advances (MCAs) are another alternative for businesses that rely heavily on daily credit card sales. With an MCA, businesses receive an upfront sum in exchange for a percentage of future sales.
The main advantage of MCAs is their flexibility. Repayments are tied directly to sales, so businesses aren’t burdened with large payments during slower months. While MCAs can be more expensive than traditional small business loans, their convenient business loan terms and accessibility make them an attractive option for many startups.
Why Alternative Business Loans Are Better for Small Businesses
- Quick and Accessible
Other lending options such as online financers and MCAs provide small business owners with quick business loans with less restriction, which makes it perfect for startups with urgents financial requirements.
- Flexible Terms
Alternate lending solutions such as MCAs and online creditors often provide flexible repayment schedules unlike regular business loans. This adaptability is what draws small business owners to choose such alternate solutions.
- Less Red Tape
Applying for a small business loan from a traditional bank often involves mountains of paperwork. In contrast, online lenders and alternative options simplify the process, requiring minimal documentation and offering user-friendly application platforms.
- Tailored Solutions
Other lenders such as online financers understand that a young and growing business has different requirements in terms of financing, and hence provide tailored solutions to these businesses. For example, an online retailer might apply for a short-term business loan to stock up on inventory before the major sale season, while a restaurant could opt for an MCA to fund renovations.
When to Consider a Traditional Bank for Business Loans
While alternatives often make more sense for small businesses, there are scenarios where traditional banks might still be a good fit:
- Established Businesses with Excellent Credit: Businesses with strong financial histories and collateral may benefit from the lower interest rates offered by traditional banks.
- Long-Term Loans: If a business needs a large sum of money for a long-term project, traditional business loan terms may be more favorable than short-term options.
- Relationships with Banks: Businesses with existing relationships with a bank may find it easier to secure financing with better terms.
The Takeaway?
Traditional banks may have been the go-to source for business loans in the past, but for today’s small businesses and startups, they’re often not the best fit. Challenges like lengthy approval times, strict eligibility requirements, and inflexible terms can make it difficult for small businesses to get the financing they need when they need it.
Thankfully, alternatives like online lenders, SBA loans, and merchant cash advances offer faster, more accessible, and flexible solutions tailored to the unique needs of small businesses. By exploring these options, small business owners can secure the capital they need to grow and thrive.
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