Small business loan myths can hold people back when they are looking for business finance. Here we'll take a closer look at these business loan myths and why they don’t stand up.
1. IT TAKES A LONG TIME TO GET A BUSINESS LOAN
Not necessarily, especially with alternative lenders. Our panel of lenders operate in the fraction of the time that a traditional bank would need. It also depends on the type of loan. While a traditional term loan from a bank can take up to two months to get approved, an unsecured business loan from an alternative lender can be approved within 24 hours of receiving the application. This is because alternative lenders have automated parts of the process to make it quick and simple - generally they are just more flexible. Instead of completing stacks of paperwork, alternative lenders can analyse your finances and other factors online to give you an answer. There are also other types of business loans that are approved within short timeframes, including equipment refinance and lines of credit. So although getting a traditional bank term loan can take some time, there are other options that are much faster.
2. YOU NEED TO GO TO A BANK TO GET A BUSINESS LOAN
FALSE. Although banks are often the first stop for business owners seeking finance, a range of alternative lenders offer a wide range business finance facilities. For example, alternative lenders use technology that makes it easy to apply for business loans online - otherwise known as ‘fintechs’. They can be more flexible in their lending decisions and utilise different types of finance products. Examples of business finance offered by specialist lenders include asset finance, equipment refinance, invoice finance and business loans.
3. YOU NEED TO COMPLETE A LARGE AMOUNT OF PAPERWORK TO GET A BUSINESS LOAN
FALSE. This only applies to some finance products, but also it depends on when information is requested. Alternative lenders are transparent in what they require, and may request much of the information at the beginning of the process. In some cases, a bank might require that you complete a business plan - this is especially prevalent for finance for franchises or new start businesses.
4. YOU NEED A BUSINESS PLAN TO GET A BUSINESS LOAN
Not really. In some cases, as mentioned previously, f you have a new business or franchise, you will need a business plan for a business loan. For most other business finance products, you won’t need a business plan. Although a business plan is not required for many types of business loans, it’s still a good idea to create a business plan, especially when you are starting out. Writing a business plan forces you to think about your business and do the research. Experts say that a business plan should be updated regularly to reflect changes in the business and the market. Read How to Write a Business Plan When Applying for a Business Loan.
5. YOU WILL GET REJECTED FOR A BUSINESS LOAN IF YOU ASK FOR TOO MUCH
Lenders don’t base their decision on how much you request as long as they believe you will be able to repay the loan. With the time and resources lenders need to set-up a loan, it is more profitable for them to lend you more (if you are seen as capable of making repayments).
When making a decision, they will look at your overall financial position and how you plan to use the money. If you ask for too little and are not able to fulfil a project that will generate a return on investment, you might not be able to pay off the loan.
For example, if you are a manufacturer and you win a large contract to supply a major retailer, you will want to increase your capacity to fulfil this new demand. If you ask for too little and can’t get the equipment, premises and staff needed to meet your expanded requirements, your clients could end up dropping you as a supplier. In this case, you will want a loan that covers your total requirements.
6. YOU NEED A PERFECT CREDIT SCORE TO GET A BUSINESS LOAN
Your credit score and history are important factors in determining your eligibility for a business loan. This is especially true if you are seeking a loan from a bank. Alternative lenders will also consider your credit score and history but, unlike banks, they are not as constrained when making loans. Besides considering your credit score, alternative lenders look at other factors including time in business, how your business is performing, your cash flow and your industry. If your business fundamentals are strong, you will probably be able to find some type of finance even if you don’t have a perfect credit score.
7. THE INTEREST RATE IT THE MOST IMPORTANT ASPECT OF A BUSINESS LOAN
While the interest rate is one of the factors to consider, there are many other points to keep in mind when choosing a business finance product. It all will depend on the circumstances and the reasons for taking out the funding.
For example, if you need funds fast for a time-limited opportunity, you might have to go with a higher interest rate loan. More specifically, let’s say you have an opportunity to purchase inventory at a large discount. If you approach a bank for a loan, you could get a better interest rate but it would take too long to get the funds. You could quickly get the funds with an unsecured loan from an alternative lender. Although the interest rate is higher, you believe that you will be able to make a healthy return on investment. In this case, it makes sense to get a higher interest loan so you can take advantage of a good deal.
Another point to consider is the overall interest paid. If you take out a long-term loan with a low interest rate, you could still pay more interest than with a short-term loan at a higher interest rate.
8. BUSINESS LOANS NEED TO BE SECURED
Some business loans need security. These are called secured business loans. For example, a bank term loan will require a personal guarantee, such as a residential or commercial property. Some types of loans are available in secured and unsecured versions – for instance, a line of credit. The major difference for the borrower is that the unsecured version will have a higher interest rate. This is because there is more risk for the lender with an unsecured business loan.
Some loans are self-secured with the item that has been purchased. For example, with equipment finance, the equipment purchased can serve as the security until the loan is repaid.
With unsecured business finance, there is no security attached to the finance facility. However, the borrower or a guarantor is required to sign a personal guarantee. So eventually, their assets could be at risk if there is a loan default.