Why Bank Lending is not Good for Early-Stage Startups.

bank lending

So there is that fantastic business idea you have that has the promise of yielding even more fantastic results, but you are yet to set the ball rolling because of money. Bank lending is a common source of startup capital which you have considered but are yet to act on due to the weighing machine in your mind that is balancing the pros and cons of going ahead with getting a bank loan.

Also read: 5 steps to raise capital for your startup without investors.

To assist the workings of your mind or to bring your thoughts to life for “careful action” sake, here are three major reasons why bank lending is not a good source of startup capital at the earliest stage, beginning with the most prominent of them all:

interest rates bank lendingInterest rate:
The expensive interest rate that you will be required to pay, in addition to the amount you requested for will end up consuming the profits you earn, leading to stagnancy. There will be no expansion in your business as instead of buying more products and services, you will be stuck with paying off your debt. You would not have enough time to attend to the issue of expansion as the date of repayment will hang on your neck like a loose noose, slowly but surely tightening with each passing day.

insufficient funds - bank lendingInsufficient funding:
Besides weighing the interest rate factor, weigh also the probability of the money borrowed covering all your business needs. The money from bank lending may not be enough to cover all your business needs as your business plan determines the amount of bank funding that the bank will make available to you. This is a crucial factor you have to consider, to avoid losing from the loan deal.

bank terms - bank lendingBanks’ strict terms:
This last but equally important factor should also be given consideration. Banks would like to gauge the probability of you paying up your debts by checking your financial track record. Financial track record! When you are yet to have a business, is that even available? I doubt the answer is yes. This is one of the strict requirements banks expect from you as they would not want to lose.

Considering all these factors, would you still go ahead with bank lending at the earliest stage as funding for your startup? You could try funding your business by yourself: selling off some assets in your possession and buying them later, engaging in door-to-door services, getting contributions from family and friends and other bootstrapping methods. Although self-funding might delay the startup process, it is proven to be a more convenient option. While bank loan is one common option for obtaining startup capital, it is not the only option. You might conclude that there is nothing that does not have its pros and cons, which is true; nevertheless, the weights of some cons are usually heavier than others.

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