The pros and cons of small businesses borrowing from banks

19 September 2017 by Odette Bester

We recently ran a survey that asked small business owners for some insight into where they turn for business funding. 32% said they look to their bank. However, other statistics show that about 72% of small business owners who do apply with their bank get rejected as they usually require strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials. Applying also takes serious effort and time. The whole process lasts about one to three months.

While bank loans are the traditional way to finance your business, it’s no longer the only way. What small business owners might not know, when turning to the bank for financial access, is that there are some important pros and cons that they should consider before borrowing money from the bank.

We’ve summarized a few key points to consider before you put yourself through the arduous process of applying or sit through weeks/months of waiting for a response to your application that could most likely be rejected.

Lower interest rates but higher fees

While interest rates at banks are generally lower than those offered by alternative lenders they are often subject to change. This makes planning and budgeting difficult for the borrower unless they have negotiated a fixed rate. These changes can negatively affect the cash flow of a business if the owner doesn’t account for possible fluctuations in repayment rates.

Business owners also need to keep in mind that although interest rates with the bank might be lower they also have added extras when it comes to fees. These include initiation fees, monthly service fees and credit life cover that needs to be taken out. So, in the end you might be paying more – this is something business owners need to consider when comparing lenders.

Arduous application process

In our small business survey, 41% of our respondents rated repayment rates and other fees as one of the things that significantly influences their business funding decision. Interestingly enough this was less than the 44% that said speed and access were their biggest influences and 42% that said the paperwork and time involved played the biggest role in their decisions.

While interest rates are important it doesn’t seem to be the biggest factor when it comes to decision-making. The time and paperwork involved have a negative impact on the customer experience with banks. Because banks see small businesses as high risk a lot is asked of them when applying for funding. There are plenty of obstacles to overcome. Intensive documentation needs to be provided which includes things such as business plans, financials, proof of address etc. These stringent processes require all of this information before the bank can even begin to assess and application.

Long-term commitment

Banking business loans have the advantage of a longer term than most alternative lenders who offer shorter term lending with higher interest rates. Because banks can often offer much larger amounts over a longer period, some business owners turn to the bank first without considering the other advantages that alternative lenders offer such as the ease and convenience of applications or the opportunity for unsecured lending – like that offered by Lulalend.

Multiple loan options

Banks advertise various types of products to entice business owners running a business. The real earnings from the bank come from the interest they charge on these loans. Options like term loans, standard business loans and others are available for the business owner or entrepreneur. However, without security most of these are null and void. Banks are not willing to provide funding for businesses who are just looking to purchase inventory, hire new employees or market their business as there is no security in these aspects.

Risk of losing collateral

Because bank loans are generally sanctioned against some collateral, often the business owners house and property, this stands the risk of being lost to the bank should the business fail to take off.

There are a number of other advantages and disadvantages when it comes to a business loan with the bank. What every business owner needs to remember is that this isn’t their only option and that they would be wise to compare other product offerings first. Lulalend, for example, takes into consideration the holistic experience of the small business owner when applying for funding.

Lulalend address the biggest pain points for small business owners. Those being the convenience, speed to accessing funds, ease of access, unsecured lending, the amount offered, and the added extras of no hidden fees or early settlement penalties. At the end of the day, forward-thinking, technology-driven lenders like Lulalend can offer a better product offering and customer experience because we believe in financial inclusion and the power of small businesses, and work to make it easier for them to access financing that can help them grow and succeed.

Source: blog.lulalend.co.za