6 Reasons Why Banks Are Not Suitable for Small Business Loans

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In the intricate world of business funding, securing capital remains a critical step for small businesses wanting to thrive and grow. While traditional banks have been regarded as a primary source of funding, the reality is that they are not always the most suitable option for small business loans. 

Navigating the banking system can present various challenges for entrepreneurs, particularly those with unique needs or limited resources. 

This article looks at 6 reasons why traditional banks fall short when meeting small businesses' financing needs and how Geddes can be an alternative business funding solution.

1. Limited Product Offerings

Banks may have specific requirements for their loan products and the suitability of loan products can vary depending on the stage of your business. 

Despite offering a range of financial products such as overdrafts, credit cards, and well-priced loans, banks may only sometimes provide the flexibility and customisation needed to meet the unique needs of small businesses. 

Startups, for example, often encounter challenges as they typically lack an extensive business history and rely heavily on personal credit history. Consequently, lower credit scores may result in loan refusals or offers with higher interest rates. As a result, these startups may struggle to secure favourable loan terms from traditional banks.

In some cases, they may even be outright refused loans or offered financing with higher interest rates to compensate for the perceived risk. 

At Geddes, our main product offerings are secured loans and invoice factoring, which we specialise in by developing tailored needs for different industries and sectors.

2. Over-reliance on your credit history

Relying solely on your credit history can pose challenges when seeking bank financing. They tend to favour businesses with impeccable credit scores, a lengthy track record of successful trading, substantial assets, healthy bank account balances etc. However, many businesses do not fit this mould. 

Small businesses and enterprises facing temporary financial challenges may find it particularly difficult to navigate the traditional banking system. 

Fortunately, there are alternative financers, like Geddes, who are willing to work with businesses that traditional banks may have turned down. We understand that businesses may face temporary challenges or have unique circumstances involving their credit.

By having a more holistic approach to assessing creditworthiness and offering tailored products and services, we can offer second-chance financing opportunities for small businesses, empowering them to secure the funding they need to succeed.

Why Banks Are Not Suitable for Small Business Loans Credit History

3. Lengthy application time 

    Extended processing times can be a significant drawback when considering banks for funding. Things like waiting for FICA documents, credit checks and other paperwork can delay the funding process, which can be frustrating when your business needs a prompt answer and when you are then faced with reactive business decisions related to cash-flow shortages, waiting for funds from banks may not be feasible. 

    Alternative lenders like Geddes consider a broader range of factors, such as cash flow, revenue trends, and the overall financial health of the business, allowing for quicker assessments and approvals as opposed to taking weeks or even months to respond.

    4. Funding gaps

      Banks may not fulfil all financing needs due to certain gaps in their offerings. 

      For instance, they typically do not provide: 

      • equity finance
      • peer-to-peer lending
      • access to business angels
      • mezzanine finance
      • cash advances
      • unsecured business loans

      While banks offer various business loan packages, they are not universally applicable, as businesses come in diverse shapes and have unique requirements. 

      Therefore, despite the availability of standard business loans from banks, they may not always align perfectly with the specific needs of every business.

      5. Debt-to-income ratio

        The debt-to-income ratio is a critical factor for big banks when assessing business loan applications. They often hesitate to lend to businesses with existing debt obligations to other lenders. 

        In fact, many big banks may outright reject loan applications from businesses that have already secured financing elsewhere. 

        This cautious approach can present a significant obstacle for small business owners, especially during the startup phase when seeking credit from multiple sources is common. As a result, securing a loan or cash advance from a traditional bank can become increasingly challenging for these businesses.

        Why Banks Are Not Suitable for Small Business Loans Debt to Income

        6. Risk Aversion

          Banks tend to be risk-averse, especially when it comes to lending to small businesses that may be perceived as higher risk. This can result in smaller loan amounts or higher interest rates, making it less attractive for small businesses.

          Time to Consider Alternative Financing

          These 6 drawbacks of working with traditional banks make alternative financing an attractive and viable option for many businesses looking to secure the capital they need to grow and succeed. If you would like to explore your options with Geddes Capital, get in touch to chat with our team about the best way to fund your business.

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