We had a recent post about alternate funding options available to businesses. I looked through the comment section to see some comments about how banks and financial institutions complicate the lending process. Well, this piece today is to tell you that a traditional loan from a bank may not be the best option for your business (depending on what business you have and what stage you are in).

Traditional lending has long been the go-to option for businesses seeking financial support. Banks and credit unions have historically played a pivotal role in fueling economic growth by extending loans to businesses of all sizes. However, in today’s rapidly evolving financial landscape, this traditional lending has limitations and drawbacks.

Lengthy Approval Processes

One of the most significant drawbacks of traditional lending is the lengthy approval process. Applying for a business loan from a bank or credit union often involves mountains of paperwork, complex documentation requirements, and weeks or even months of waiting. If you are starting a small business and need quick capital infusion, this can be a deal-breaker.

In contrast, alternative financing options such as online lenders and crowdfunding platforms offer quicker approval times, allowing businesses to access funds when needed.

Stringent Credit Requirements

Banks typically have stringent credit requirements, making it difficult for businesses with less-than-perfect credit histories to secure loans. This can be particularly challenging for startups or small businesses still establishing credit profiles. Alternative lenders often use a broader range of criteria to evaluate your loan applicants, thus giving more businesses access to funding opportunities.

Collateral and Personal Guarantees

For many intending businesses or small business owners, this is the one reason to avoid traditional lending. Banks often require borrowers to put up collateral or personal guarantees to secure a loan. This can be a risky proposition for business owners who may have to risk their assets, such as their homes or savings, to obtain funding. Running a business involves some pressure, and having guarantors or collateral involved heightens the stake. Alternative funding options often provide unsecured loans or offer other forms of credit, eliminating the need for collateral and personal guarantees, which can be a more attractive option for many business owners.

Limited Flexibility

Traditional loans typically come with fixed terms and repayment schedules. It is not a pay-when-you-can or pay-when-you-make-a-profit arrangement. When it is time to pay, you must make the payment irrespective of whatever loss you may still be making. While this can provide predictability, it may not suit businesses with fluctuating cash flows or seasonal sales patterns. Alternative funding options often offer more flexibility in terms of repayment, allowing businesses to tailor loan terms to their unique needs.

Innovation and Technology

The world of finance is evolving rapidly, driven by technological advancements. Traditional banks are still lagging in adopting innovative technologies and digital lending platforms. This can result in a not-so-nice user experience for borrowers and slower processing times. Alternative lenders, on the other hand, often leverage cutting-edge technology to streamline the lending process, making it more efficient and convenient for businesses.

Limited Accessibility for Small Businesses

Large banks often prioritize larger businesses when it comes to lending. Small businesses may struggle to access the financing they need from traditional sources. If you doubt it, you can go to the bank for a loan to fund your small business and see how it goes. This can stifle innovation and growth in the small business sector. Many alternative lenders specialize in serving the needs of small businesses, providing them with greater access to funding opportunities.

Conclusion

Traditional lending options will save the day for some businesses, but not all. If you decide to go this route, do your analysis right and be sure that you are in the right kind of business to take it on. You should also be in the right stage of business to be sure that you will not run into uncertainties that would prevent you from repaying the loan. Also, do your calculations and ensure that you have a higher growth rate than the interest rate; otherwise, you might just be setting yourself up to fail.

If, however, you make all your considerations and decide that a bank loan is not for you at the moment, then consider alternative financing options. They are more accessible and flexible and might give you the leverage to push through. Also, the absence of stringent credit requirements or collateral demands places it within your reach. All you need is to have a proven business idea and conduct research as necessary.

Max Weber was a German classical sociologist who lived in the 20th Century. Max is one of the founding fathers of Sociology. He founded interpretive sociology as an alternative worldview to Positive Sociology. The interpretive sociology also developed to bridge the ideological difference between the consensus theory led by Emile Durkheim, August Comte etc and the Conflict theory led by Karl Marx and Fridrich Engel, etc.

Unlike its predecessor, Positive Sociology, where the social world is seen as a fact that is observable through scientific methods, Interpretive Sociology sees the social world as constantly being constructed and reconstructed through meanings that develop from the day-to-day actions and interactions of humans in society. Therefore, according to Interpretive Sociology, social phenomenon is to be understood based on three principles which include meaning, context and subjective reality.

It is believed that we experience Society subjectively because we give it meaning by the way we behave. In other words, we create and recreate our sense of the world on a daily basis. For instance, every time that we go to school, this behaviour helps to recreate the structure of education.

On the contrary, when we think of society as real or as something forcing us to act in certain ways, we are simply creating a convenient (fictional) explanation for our behaviours. Basically, society does not make anyone do anything. People do.

The sociological paradigm also presents knowledge as a social construction and is therefore relative based on context. For instance, one’s account of behaviour is just as reliable and as valid as anyone else’s account. Even though facts about behaviour can be established, they are always context-bound. That is why a particular construction or belief may not apply to all people at all times; they may not even apply to different people in the same situation.

Essentially, since the social world is interpreted differently by different people in different contexts, everything in the social world therefore is relative. Nothing can ever be held as wholly true or outright false. The best we can do is to describe reality from the perspective of those who define it or those whose behaviour we seek to understand. Therefore, according to Max Weber’s interpretive Sociology, Sociological understanding or analysis should be about understanding and appreciating how people as a group or culture define and interpret their social realities.

Max Weber used the German concept, Verstehen, which literally interprets in English as ‘’empathetic understanding’’ to describe how Interpretive Sociologists must seek to unearth the hidden meanings of human action or behaviours. In doing Verstehen two things are quite germane to uncover the hidden meaning of people’s behaviours. These include the non-verbal expressions and the motivations of people when they act or interact. Therefore, Max identified two types of Verstehen which are discussed as follows:

Observational Verstehen: Observational Verstehen entails analyzing body language or non-verbal communications such as facial expressions to uncover the motive of people’s behaviours.

Explanatory Verstehen: This is when behaviours or actions are analyzed in terms of the motivations of the people. This according to Max Weber is a more thorough and empathetic Verstehen.

Support and Criticism

Empathy which in the context of Interpretive Sociology is “Verstehen” has generally been accepted as an ideal type of knowledge and a more humane way of reaching an understanding even beyond the realm of Sociology. Some define empathy as the height of emotional intelligence.

However, the flip side of adopting verstehen or empathy in interpreting and understanding behaviours is that such endeavour is indeterminate. For example, people could lie about their true feelings or motivations, and many actions could follow from a given motive.