The growth of startups worldwide has been nothing short of phenomenal over the last five to ten years. That growth is reflected in funding, which grew some 1400% between 2012 and 2017. Venture capitalists and lenders pumped $15 billion into US start-ups alone during that same five-year period.
It’s fascinating to look at where start-up funding comes from. Suffice to say that banks are not the best option. An entrepreneur looking for startup loans could do a lot better for himself than going down to the local branch of a high street bank or building society to ask for money.
Are you curious as to why banks are not the best option? Here are five reasons that tell the whole story:
1. Banks Aren’t Structured for Start-Up Loans
At the top of the list is the simple fact that banks are not structured for start-up funding. Retail banks, by their nature, exist to serve average consumers looking to establish savings accounts and write cheques. They also need consistent cash flow in order to make retail loans.
Simply put, high street banks are built to serve retail customers. Though they could offer start-up loans — and sometimes do — it isn’t in their best interests to make it a regular habit. Too much start-up lending would interfere with their ability to serve retail customers.
2. Banks Are Hands-Off Institutions
Next, retail banks tend to be hands-off financial institutions. They do not tend to take a vested interest in the financial success of their clients. As such, a bank is not likely to involve itself in the day-to-day workings of a start-up in order to ensure the new company actually makes money.
Things are just the opposite with venture capital. The person or persons offering venture capital are very much interested in the success of those they loan to. That is a good thing; according to a Wall Street Journal report from 2016, higher levels of venture capital in a given area generally mean more new start-ups and greater growth in existing start-ups.
3. Banks Have Lower Risk Tolerance
Because retail banks are dealing with so many small, individual accounts, they have a much lower risk tolerance. They cannot afford to have a lot of their cash tied up in business loans that could prove problematic. Too many bad business loans could put a bank completely under in no time at all. It is not worth the risk to them.
4. Banks Have More Stringent Borrowing Requirements
Banks have always had more stringent borrowing requirements compared to venture capitalists and angel investors. Those requirements were only made stricter following the financial crisis of the last decade. It is now nearly impossible for start-ups to get bank funding. And even when such funding is available, business owners have to jump through hoops to get it.
One of the difficulties here is the fact that borrowers typically have to rely on their own assets and credit history to get start-up loans. Unless the borrower has a stellar track record, getting an affordable bank loan is nigh on impossible.
5. Banks Haven’t Yet Caught Up
Last but not least, traditional high street banks tend to still lag behind in terms of both technology and culture. They are not on board with the way modern business does things. Until they catch up, they will fail at being the kind of flexible, responsive lenders modern business requires.
The truth of the matter is that banks are not the best option for start-up funding. Maybe you have a great idea you think has the potential of becoming the next Uber. If so, you should probably investigate all of your funding options before you get a start-up loan. There are a number of other better options for getting the financing you need.
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