What are the advantages and disadvantages of a bank loan?

How to obtain a bank loan when starting a business? 

Contact several banks to present your project

A bank loan is a type of cash credit, financing granted by a banking institution to a company under a set of conditions in order to support its development.

To obtain a bank loan, the entrepreneur must defend his file to a banker (or more often to several banking institutions).

Indeed, presenting your file to several banks increases the chances of having one that accepts to finance your company. This also allows you to compare the different conditions of granting, which can vary greatly from one bank to another. 

First, we recommend looking for a bank that understands your type of business as well as possible.

Putting together your loan application

In order for the bank to accept to finance his company, the entrepreneur must present a file including different elements.

A business plan

The business plan should consist of the following sections:

• Introduction and general presentation of the company's project
• Their company's goals (and their time frame)
• The projected balance sheet of the company
• The projected income statement of the company

Very often, entrepreneurs need to be accompanied by professionals to draw up their business plan.

A financing plan

This document makes it possible toevaluate the profitability of the project and toassess the need for financing and the critical moments in terms of financing needs. The financing plan presents all the needs and resources of your project.

Requirements:

1. Set-up costs (costs related to the administrative formalities of creation)
2. Intangible fixed assets (intangible assets serving the company in the long term, such as software) and tangible fixed assets (tangible assets such as furniture, automobiles, etc.)
3. Financial assets (money to cover expenses such as the first rent or a security deposit) 
4. The start-up cash flow (this will allow for example to pay the VAT)
5. the working capital requirement (i.e. the amount of money needed to keep the company going, for example when there is a time lag between the payment of suppliers and the collection of customers)

Resources:

1. Equity (the contribution of the entrepreneur or the various partners)
2. Borrowed capital (in this case it is the amount needed)

This implies a good understanding of all the different subsidies that a company can claim. It is also necessary to foresee in a rather precise way the different cost items to come.

This evaluation of the cost items allows to evaluate the amount of the loan necessary to launch the activity. It is also in this financing plan that the entrepreneur must indicate his personal contribution, a variable that often influences the banks favorably because it shows the real involvement of the entrepreneur in the project. 

Guarantees

This is often the most complicated part for a young startup, but bankers often want guarantees . This can be material guarantees or guarantors (physical persons attached to the project). These guarantees are often very complex to obtain for a tech company or a SaaS ... 

Evaluate the reliability of the project

After having studied all the above elements, the banker will judge the financial reliability of the project, i.e. he will evaluate if the project seems realistic and convincing.

The balance between equity and debt will also be checked as the bank wants to share its risk as much as possible.

Finally, you can diversify the sources of financing, i.e. call on several banks to divide the amount borrowed from each and thus spread the risks.

What are the advantages and disadvantages of a bank loan?

What are the advantages of a bank loan?

The bank loan has several advantages for business owners.

The bank loan is non-dilutive 

Non-dilution means that the business owner does not give up part of the ownership of their business in order to obtain financing.

Fundraising, for example, is a dilutive method of financing. Indeed, it makes the entrepreneur lose control over his activities and forces him to make compromises with investors.

The bank loan allows you to benefit from tax deductions 

The repayment of the principal and interest of the loan is considered a business expense and can therefore be deducted from business income taxes.

What are the disadvantages of a bank loan?

Getting a loan is a long and time consuming process

While traditional bank loans offer certain advantages, quick business loan stands out for its responsiveness and accessibility, offering a solution tailored to those who cannot wait several weeks to obtain financing.

Gathering all the information needed to put together your application and identifying the banks that are right for your project is the first step, which takes a lot of time. Once the application has been put together, it is then analyzed, which usually takes several weeks.

Bank loans often require a capital contribution. 

In order to demonstrate to the lenders his motivation and his involvement in the project, the entrepreneur must often make a personal capital contribution to the business.

Young entrepreneurs often cannot make this contribution and are therefore at a disadvantage when dealing with companies. 

Bank lending can be a risky process for the entrepreneur

In any case, the loan must be repaid, even if the company goes bankrupt. There is not much room for flexibility. 

Indeed, in most cases, the only way to convince banks to grant you a loan is toagree to take personal guarantees on the loan. 

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The bank loan responds to economic and market trends

The bank loan emanating from the large national banking structures, the latter depends reciprocally on the macro-economic movements. When the country's economy is in the green, the bank loan is a very interesting financing solution, with virtuous interest rates. Conversely, when the macro-economic situation of the country is reversed, the bank loan is no longer a preferred source of financing because of its tangible nature.

We know that 2023 will be marked by a relative macro-economic crisis and will negatively impact bank loans, to the point that they are gradually approaching their usury rate.

What are the alternatives to a bank loan?

Since bank loans often involve too many drawbacks for entrepreneurs, there are many alternatives to bank loans. For short-term financing needs, short-term credit may be a more suitable and flexible solution. Here are the main alternatives:

Fundraising 

Fundraising is a dilutive means of financing. In exchange for shares in the company, VCs and investors finance the company. The riskier the financing, the more dilutive it is. 

Fundraising has many advantages. You do not have to pay back the funds raised and you benefit from the expertise and network of investors. It also has disadvantages: the process of raising funds is often time-consuming and by obtaining this financing, you dilute your capital. 

Other forms of financing 

But that's not all! Depending on the size and needs of your business, you can also turn to other financing alternatives such as : 

• Public aid and subsidies, particularly from the BPI , which is partly dedicated to supporting business creation)
• Self-financing. Attention, this method of financing requires that the company has funds to invest and thus a history of activity. Another form of self-financing would be under a small initial contribution in capital of the creator, who often cannot make this contribution.
• Crowdfuning 
• Lhe convertible bond

A bank loan can often be long and complex for a business owner to obtain, but has the advantage of being a non-dilutive financing solution. There are other non-dilutive options for business owners, such as the Karmen loan.

The constraints of traditional bank loans often make it difficult for SMEs and microbusinesses to access financing, hence the importance of exploring more flexible and accessible alternatives such as digital solutions.