The current financial scenario carries both good and bad news for small businesses. While it has become harder to get a conventional bank loan sanctioned, many avenues of alternative financing have accordingly opened up. Bank loans however retain their charm due to several attractive features, not least the small interest rates.
The rejection statistics for bank sanctioned loans are quite disheartening. Over 72% of applications from small businesses are rejected for failing the strict criteria. The criteria have become stricter after the recession of 2008, with large banks favoring only those with impeccable credit scores, revenue streams and overall financial health.
Does it still make sense to apply for traditional bank loans? There are several benefits that make a bank loan preferable. The interest rates are extremely low compared to alternative avenues, and do not change. The payment process is fixed too, and thus without surprises. A small business can go for a wider range of options available, from small loans, credit cards and SBA loan to term loans, etc. The process usually takes up to three months.
Another distinguishing feature of bank loans is that lenders do not acquire any stake in the business. They cannot interfere with or manage the business strategy either, and only need the debt to be settled. The relationship with a bank can stand as a good support for a business. Another feature is that interest payments come with tax benefits.
Bank loans today need a business to have excellent credit scores. They also require collaterals, guarantees, and paperwork, and carry out due diligence of the business history and performance. They may want to know information related to investors, costs, profits, and ability to repay the loan. This explains why only a few small businesses are successful in raising finances when needed.
In the current scenario, established banks are likely to play safe. Small businesses should keep all options open on how to get business funding, and diligently study the financial vehicle options available to them to make a prudent decision.