Debunk Common Beliefs about Loans

Business loan applications are made to obtain start-up capital, expand an existing business, purchase required inventory or to strengthen finances. Traditionally, banks had been the major source of funding for most businesses. Recently, the trend has been reversing with most businesses opting for other means of funding that include trade financing or equity. The trust level in banks is also going down according to a recent study.

The process of obtaining business loans from banks is challenging. Many companies mistakenly think it is easy to obtain loans from banks and are not aware of the pitfalls on the road to business financing from banks.

Common misunderstandings on bank loans

Some of the common misunderstandings companies have regarding loan applications include:

Expecting an immediate release of loan: One of the most common misconceptions relates to the belief that the bank will release the loan amount immediately. Banks take a long time to process the loan, and each bank can have different timelines for loan approval and release of funds. Many business owners do not also factor in the time it takes for them to complete their business plan and paperwork essential to apply for a loan. A small business loan could take a few days to 2 weeks to get released while the evaluation time for bigger loans is lengthier. The time taken would also depend on the complexity of the loan application and overall financial health of the company.

Thinking the entire amount will be sanctioned: While the application and evaluation process is often cumbersome and lengthy, even when the loan is approved, the entire amount is determined by the bank’s credit department. In some cases, banks may not grant the full amount originally requested. For instance, if you apply for $100,000 loan, but the approved amount is $80,000. You will need to find other means to obtain the remaining sum. This presents more problems for companies which have to hunt for other sources to fill the gap. While some companies may apply for a loan via multiple banks, due to a shared credit score database, it is hard for the banks to justify the credibility of the applicants if they appear “hungry” for loans.

Believing banks will act in clients' best interests: Most companies that go in for bank loans believe the bank will work closely with them and offer the best, suitable loan product. Most banks won't. Many times, banks do not disclose crucial information related to refinancing, flexible lending rates and options on repayment. The obvious solution here is to do your research, ask all the relevant questions, and then only make a decision. However, without insider information, it is hard to find out the reason behind a rejection by the bank, as banks do not disclose such information.

Getting a realistic picture of business loans is important to get insights into alternative sources of funding and making informed decisions on loan applications.

The article was written by Janus Lim (Finaqe)