Aspiring entrepreneurs often think that bank loans are the most accessible source of funding for their startups – however, a recent book titled "The End of Banks: How to Protect Your Business from the New Financial Disorder," by Jonathan McMillan, suggests that startups should avoid banks altogether.
The book argues that banks have become too risk-averse and bureaucratic to be a reliable source of funding for startups. Instead, McMillan suggests that startups should seek alternative funding sources, such as venture capitalists, angel investors, or crowdfunding platforms.
One of the main reasons why banks are not ideal for startup funding is their preference for collateral-based lending. Banks typically require startups to provide collateral, such as real estate or inventory, to secure their loans. However, most startups do not have enough assets to qualify for bank loans, which can hinder their growth and survival.
Moreover, banks are often slow to process loan applications and require a lot of documentation, which can be daunting for startups that need funding quickly. Getting the right paperwork in order is sometimes difficult for established companies that already know the rules of funding, but for startups, it can be a seemingly impossible feat. Startups may also have trouble meeting banks' strict lending criteria, which often prioritize established businesses with a proven track record of profitability.
On the other hand, McMillan says, alternative funding sources such as angel investors are often more willing to take risks on startups. There's a more interpersonal element that allows business owners to connect with their investors and get hands-on help along the way. Additionally, these investors are looking for high-growth potential and are willing to invest in companies that are not yet profitable. McMillan adds that if investors aren't the right fit, crowdfunding platforms can help startups raise capital quickly by tapping into a large pool of potential investors who might also be buyers in the future.