Are Traditional Banks Still the Best Source for Business Loans?

For a long time, big banks gave money to businesses that needed it. Whether a small shop or a big company, you went to your nearby bank building to ask for a loan. These traditional lenders provided vital money to help businesses start, grow, and keep running.

But is getting money from an old-fashioned bank still the best choice now?

The world of lending money has changed a lot recently. Newer ways to get money have come up, like online lenders and money tech companies. They offer some kinds of loans that banks don’t, such as home collection loans, where the lender provides loans at home. These new lenders also frequently give merchants cash money, invoice funding, lines of credit and bad credit business loans – types of funding not helped much by banks.

Pros of Traditional Bank Loans

Stability and Reputation of Traditional Banks

Big brick-and-mortar banks have very strong names. They’ve existed for many decades. You probably already bank with them. This makes them feel safe and reliable. You know these big finance companies will still exist far into the future. This steadiness appeals to lots of owners.

Lower Interest Rates and Fees for Established Businesses

If your business fits their lending rules, bank loans feature low rates. The fees to get and maintain the loan funds are also quite small. But to unlock these cheap rates, you must meet their strict requirements. Things like high credit scores and strong income.

Cons of Traditional Bank Loans

Stringent Eligibility Criteria and Lengthy Application Processes

To get a bank loan is very hard. They want perfect credit histories. They scrutinise every part of your finances. They require you to have collateral like property. The application process has lots of steps and paperwork. Preparing it all takes weeks or months.

Limited Flexibility and Innovation Compared to Alternatives

Banks use the same lending models from decades ago. Their products don’t adapt to modern business needs. If you’re a new firm without assets, it’s nearly impossible. Alternative online lenders cater better to startups. They use modern data for approvals. Their technologies make things faster.

Rise of Alternative Lenders

In recent years, many new lending companies have appeared in the UK. They operate fully on the internet with digital processes. Financial tech startups build new software and data systems. Their modern ways challenge old lending at big banks.

• Simple online forms to apply
• Get money in just days
• Use new tech for lending
• More chances for new firms

Get Business Funds Quickly From These Lenders

These alternative lenders aim to give businesses money fast. Their easy online applications take mere minutes. You get a decision rapidly, sometimes right away. Money deposits are within days, not months, like banks. They also say yes to some borrowers whom banks reject.

You can quickly get bad credit business loans from direct lenders in the UK. These direct lenders have flexible rules compared to traditional banks. They look at more data beyond just credit scores. So, businesses turned down by banks have more chances.

One study found that 35% of UK firms got funded this way after a bank denial.

People-to-people lending sites connect borrowers and regular investors directly. Cutting out the bank middleman allows cheaper rates. Both people have reasons to make good lending choices.

Flexibility and Adaptability

Unlike big banks with strict loan types, alternative lenders create custom programs. They build offerings for modern business models. This lets them fund a wide range of qualifications and uses.

• Use new lending rules
• Judge full money situation
• Not just rigid credit scores
• Specialise in underserved areas

Fund Businesses in Unique Money Circumstances

Alternative lenders frequently say yes to businesses rejected elsewhere. They look beyond just credit scores. Their evaluations also consider cash flow, operations, projections and other money data. This provides more chances for businesses with credit issues or unique financial profiles.

One study by Aldermore Bank showed why UK businesses use alternative lending:

Reason	Percentage
Bank said no	32%
Need money faster	28%
Credit not good or established	22%
No collateral or new business	18%

Collateral Requirements

Big banks often want collateral for business loans. Collateral is an asset like a building or equipment. The bank can take this if you don’t pay back the loan.

One study found 43 out of 100 small businesses had to provide collateral to get a bank loan. A restaurant owner was denied a £250,000 loan even after 10 years in business. It is because he didn’t have enough assets to use as collateral (CNBC, 2021).

Alternative Lenders May Not Need Collateral

However many online lenders provide funding with no collateral needed. They look at cash flow, performance and other numbers instead of just assets. This works well for businesses without lots of extra equipment or property.

Charges from Alternative Lenders:

Loan Type	Interest	Upfront Fee	Term
Term Loan	10-35%	3-5%	1-5 years
Line of Credit	10-40%	3-5%	Renew yearly
Merchant Cash Advance	15-50%	Factor rate	None
Invoice Financing	10-60%	3-5%	Per invoice

Industry-Specific Expertise

Some traditional banks lend mostly to businesses in specific industries. They create special loan products for the needs of those industries.

According to a UK survey by British Business Bank, over 25% of smaller businesses used a specialised industry lender in 2021.

The study showed banks specialised in areas like:

• Farms and agriculture
• Healthcare practices
• Restaurants and hotels
• Manufacturers

These banks understand the unique money needs and cycles of those business types. Their customised loan offerings serve those niche markets well.

Online Lenders Also Help Niche Businesses
 In addition, many online lenders provide funding for niche business models. They develop loan programs for underserved business types. Examples include:

• Brand new startups
• E-commerce and online sellers
• Franchise businesses
• Immigrant and minority-owned firms

Conclusion

Businesses today have more choices than ever before when it comes to getting money. Getting a loan from an old-fashioned bank still works well for some companies that meet strict rules. However, for others, the ease and specialities of these new alternative lenders may work better.

There’s no one perfect answer for where to get business money. It depends on your specific situation, qualifications, and what you need. For instance, an online lender may serve your needs better if you need money fast or can’t meet rigid bank standards. But if you check all the boxes for affordable bank money, that may remain your favoured path.