Your business needs financing, maybe a term loan to launch a business expansion, maybe a line of credit to upgrade old equipment or maybe some kind of working capital loan to bridge the gap between busy seasons. Regardless, you know that the best place to get a business loan is from a bank — right?
Not necessarily. Before you potentially waste precious time pursuing a loan from a bank, you might consider the pros and cons of business bank loans as well as other options that might be more suitable for your unique needs.
Pro: Generous Amounts
Banks are enormous financial institutions with an incredible amount of capital at their disposal. Thus, they have the opportunity to extend generous loan amounts to deserving small businesses. If you are in need of a large amount of funding, ideally in one lump sum, you might want to pursue a bank business loan.
Pro: Greater Flexibility of Use
Often, lenders want to know how you are going to use the loans they provide, as they want to be certain that you are using the money in a way that allows you to repay them in a timely manner. However, bank business loans tend to be much more flexible in how they can be used, so you can pivot your business strategy without defaulting on your loan.
Pro: Lower Interest Rates
All loans come with interest rates, which is the amount a lender charges for borrowing money. Instead of a fixed price, an interest rate is a percentage of the principal of the loan, so the higher the interest rate, the more a borrower will pay beyond the loan amount to rid themselves of debt. Banks tend to apply lower interest rates, which make bank business loans more attractive to most business owners.
Pro/Con: Longer Repayment Terms
A long repayment term is a double-edged sword. On one hand, a longer term makes for lower monthly payments, which can allow a new or struggling business more flexibility in their budget. On the other hand, long repayment terms can allow more interest to accrue, increasing the amount a business needs to pay.
Con: Strict Application Requirements
Banks are extremely picky when it comes to working with business borrowers. Because their loan amounts are so high and terms are so generous, banks will only accept the best of the best applications. To receive a bank loan, you and your business must have strong credit scores, and your business must be of a certain age with a certain level of financial stability. In truth, few businesses qualify for bank business loans.
Con: Lengthy Waiting Periods for Approval and Funding
As large institutions, banks have many layers of bureaucracy through which information must be processed. Resultingly, it can take weeks or months for loan applications to make their way through banks, and even after they are approved, it might take another few weeks for funding to be released. If you need financing fast, you should look for another lender option.
Where Else Can You Get a Business Loan?
If the pros and cons listed above have convinced you that a business loan from a bank is not right for your business, you might wonder about your other options. Fortunately, banks are far from the only lending institutions that offer loans and other financing products to small businesses.
Most small businesses today turn to online lenders, which tend to be more convenient to access and more generous in their loan options. Requirements for small business loans online tend to be more lenient, with lower barriers for credit scores, business age and more, so a larger number of entrepreneurs can find the funding they need to keep their business afloat. What’s more, there is a large number of online lenders to work with, so if you are dissatisfied by your interactions with one, you can explore your options with another.
If you prefer to work with a lender face-to-face, you might also consider pursuing a business loan from a local credit union. Usually, you must be a member of the credit union to qualify for their lending programs, and there can be even stricter financial requirements and more stringent prerequisites than there are with banks. Still, the familiarity of one’s own community credit union is valuable to some business owners.
The bank might seem like the best place to get a high-quality loan, and for some entrepreneurs, it is. However, most business owners opt to use alternative lenders to fund their business dreams because bank loans are notoriously difficult to acquire. With this information, you can make a better decision for your business and achieve the success of your dreams.