The lure of money leads many businesses to assume that it is easy to get cash in the bank. What they grossly underestimate is the creative energy, time and effort which goes into raising this outside capital. During the fund-raising campaign, managers are known to drop everything they are working on, just to devote all their efforts to find potential finance sources.
Getting a nod can take six months to a year, during which a venture can fall flat even before it gets an opportunity to get on its feet. So if you are looking to expand your company to the next stage, and have some misconception about business financing, take a look at these top five myths that can impact an entrepreneur in deciding what is best for their enterprise.
You can easily raise money from investors
Every entrepreneur understands that though the chances of money are out there, the challenge of landing the capital to fund a company’s growth can be exhilarating. Loans given to a new business are usually saddled with risk, while finance for startups can be still harder to come by, as there is no guarantee of success.Since stringent loan regulations have made traditional lending routes unfeasible, entrepreneurs are left with no option but to turn to alternative money lenders to boost their industry.
The answer to the question that whether it is easy to raise money from investors, even if you are a pre-customer, is not universally true. With a huge number of businesses being launched these days, investors have the option to wait till companies have more traction to invest. The cost of marketing a sophisticated tech product today is about 10% of what it was 20 years ago.
Conventional wisdom, therefore, says if this team can’t build a product with their own money, they probably won’t be able to do it with the investor’s money either. This means savvy investors are now seeking evidence of marketplace success, making it difficult for the founding team to raise money before customer acquisition.
Banks are happy to finance businesses
If you are looking for a bank loan for your company, be prepared to give a lot to the bank before they give it to you. Banks deal with money of the depositor, so no customer would want their savings to be invested in a startup unless it has hard assets to pledge to back up their business loan application.Before sanctioning a loan, banks re-evaluate the repayment capacity of the borrower and other factors such as age, income, company profile etc. If a business lacks any of these criteria, getting approval for a business loan can be difficult.
For business owners looking to borrow small sums, applying for a bank loan is not worth the effort. Banks are happy to support businesses that are interested to borrow large amounts, payable over a long period of time at favorable interest rates. Alternative lenders have varied lending options than the banks such as secured and unsecured loans that may not debunk the guaranteed approval for bad credit myth, but on the whole they are far more receptive in comparison to banks.
While money lending is the primary source of profit of a bank, more often than not they are unwilling to lend money to certain borrowers due to the following reasons:
- Incomplete documentation: Banks need some sort of collateral as security against loans. Many persons are unable to provide the documents which the banks ask for.
- Previous loans: If the borrower has not paid the previous loans or defaulted on any instalments then the banks may not be willing to extend further loans.
- High risk business: Your business may show profits, but if it is of high risk, the banks would not want to lose out in case of a downturn.
If banks reject you then online lenders are happy to address your requirements ( Become.co’s Smart Calculator)
The one of the biggest business financing myths is that if a loan has been rejected by banks due to imperfect credit rating, then there are online lenders willing to address the issue. While this may hold true with the traditional types of lenders, there is no harm in discussing your requirement with another lending specialist. They may be able to get a better understanding about the cash flow and annual turnover and take a balanced view on the terms of repayment.
There are many lenders in the market that will consider businesses with credit scores in the poor range. Moreover, these online lenders are not interested in what the business has done in the past, than they are in how it is doing now and what is planned for the future. However, these borrowers are considered a risk, as such available loans are likely to be more expensive. If you need a bad credit loan, shop around for the best terms to keep repayment options manageable.
Once your business is profitable, then you can easily get financed
Conditions describe the economic climate of your industry. Your business may have capacity, profit and adequate collateral,but if the industry is high-risk, a bank may decide to pass on your loan.This is not because banks consider it to be a bad credit business loan but because there could be a potential downturn in the industry, putting the bank’s money at risk. The importance of sanctioning a loan rests entirely on how much profit the bank could make from it, without putting the customer’s money in jeopardy.
Banks make money by giving out loans to businesses and individuals.Despite the overall health of the company, financial institutions redefine the conditions from time to time regarding the customer’s creditworthiness for availing and repaying the loan. So if you can demonstrate that your finances are strong, then only are you likely to receive help from them when you need it the most.
If you have the ‘bank connections’ it will set this area easily
A bank can be your lifeline when the going gets tough for your business, but will they give you a loan if they don’t know you? The answer will most likely be ‘No’.Usually the older your relationship with the bank the higher the chances are of getting a loan approved.Those banks which are aware of the financial past of their customers, value them the most.
Again, for the bank the customer is king as the lending capacity of a bank depends entirely upon the deposits of the customers. This is why the bank has to constantly reach out to new customers to create a broader loan base.
For example, a person who has been dealing with the bank for many years, will definitely be preferred over someone with no previous relationship with the bank. That said, though having a banking relationship is good for business, there are other factors a bank will consider even if you are their most valued customer:
- Character: No matter how much collateral you can put up, foremost on the list is trust. Simply put, if you have a dishonest reputation, your loan will not be approved.
- Collateral: Banks will prefer to take property or assets as collateral to recover their loan in case the borrower fails to pay it back.