Why You Should Not Apply for a Bank Loan

Financing is critical for the early stages of growing and starting a business. You are likely to require a loan to keep operations going or purchase assets unless you are able to raise capital from other sources. Most banks offer loans to small business owners, you might not qualify especially if your business is a startup.

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

5 Reasons Not to Apply for a Bank Loan

Banks Normally Do Not Lend to Startups

When determining if you are 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 might not be able to pay their debts. If you apply for a bank loan as a startup owner, your personal credit will be scrutinized since your business does not have any credit.

Personal Credit Score Affects 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. It is important that you make payments on time and are able to take on additional debt. You need both excellent business and personal credit scores to qualify for most SBA backed loans. While a good credit score will not guarantee you a loan, a bad score is going to work against you. If there is any blemish on your credit report, your application might be rejected.

The Application Process Is Not Easy

Each lender is different so the number of days the application takes to process varies but it takes a minimum of 60 to 90 days. Some of the information required for an application includes personal and business background information, details of your business experience, and your credit history. if you apply for a bank loan, you ill need to make sure that you have a business plan and that it will answer the questions of the lender. You will be asked to provide detailed financial statements and cash flow projections to justify your loan request and ability to pay it back. You should also be prepared to provide your personal financial statements and tax returns to indicate your strength as a borrower.

If you require financing immediately, applying for a bank loan might not be your best option.

You Need to Submit Collateral

When you apply for a loan, you will have to submit collateral to secure the financing. Collateral can be real estate, inventory, equipment, and anything else that has the value of the loan you have received. It can be risky to submit collateral because if you cannot repay your loan, the bank will be able to seize the collateral. Without the collateral, your business cannot be put in jeopardy.

Your Industry Might Be Excluded

Certain industries are not eligible for bank loans even though you meet all the requirements. This can make getting additional financing challenging and you will be forced to pursue other options.

While traditional bank loans can be an effective source of financing for many small business owners, they are not right for everyone. Consider all your options before starting the long process of applying for a bank loan.