business loans

7 Misconceptions About Small Business Loans

by Josh Biggs in Finance on 18th April 2021

When it comes to financing a business, it’s hard to separate the truth from fiction. Regardless of how long your business has been in operation, the truth is that at some point, you’ll need small business financing to help you out.

But do you have all the details you need to know before you start your journey for loans? There are a lot of myths and misleading information about small business lending and financing in general. If you start your borrowing journey, this misleading information might cost you in the future. 

This is a great post to read if you’re looking to know some of these misconceptions and what are real facts about small business financing. Read on!

  1. Banks are the Only Lenders

Though many believe that banks are the only option, the fact is that banks are one of the many sources of loans. Banks are well-known sources because they’ve been around for many years than other sources. Different options such as working capital loans and crowdfunding can help fund your small business without going through the intimidating and lengthy borrowing processes from banks.

  1. You Must Have A Perfect Credit Rating

This is the most misleading information out there. Most people believe that you must have a perfect credit history if you want to qualify for a loan. While most banks will go by your overall borrowing credit score, other lending institutions will look at the duration you’ve been in the business and your daily or monthly transaction like deposits and withdrawals. They do so to have a better understanding of how your business is performing. 

  1. You Must Provide Collateral To Get A Business Loan

Providing collateral is the most worrying part of the loan borrowing process. You’re taking a loan because you have limited finance to carry on your business operations. So, providing collateral can, most of the time, be practically impossible. 

Although many lending institutions will require you to provide security in exchange for a loan, it doesn’t apply to all kinds of loans. There are many lending institutions out there that don’t require collateral. Such loans include merchant cash advances, business credit cards, and unsecured business loans.

None of these options will require you to provide collateral to get a loan. But instead, the lending institution may require you to provide a personal guarantee, which means you’ll be liable to pay back the loan your business owes if it goes bankrupt.

  1. Only Financially Distressed Firms Apply for Loans

Most people believe that only financially struggling firms can apply for loans. Little did they know that even the most financially stable businesses rely on external financing for growth and expansion. And sometimes, their money might be tied up in some projects and there arises a need for money to finance other internal processes. So, the only option available for them is to take a loan.

  1. Your Repayment Might Increase If There’s An Increase in the Loan Interest Rate

Interest rate is a key element when it comes to small business financing. Most people get scared that the interest rate might change during the loan repayment period, and they might be unable to make loan repayments. Don’t worry. A fixed interest loan can be the better option for you because there’ll be no spikes in interest rates.

  1. You Can Only Get A Loan If You Need Large Sums of Money

Don’t assume that business financing is possible only for businesses that need large sums of money. Although most banks will prefer loaning large amounts of money worth their investment, other microfinance options can lend small amounts of money. No one should force you to take a big loan if you don’t need it.  Go for those microfinance and other lending institutions, and they’ll help you meet your needs. 

  1. It Takes Ages for Loan Approval

When there was no good technology, securing a loan required compiling many documents, taking them to the bank, and then waiting for several months to get the feedback. Fortunately, this has changed over time, and with technology, it can even take ten minutes for a loan to be disbursed into your account. 

Takeaway

No matter how small your business and your financial requirements are, you can always find a better finance option.  But before you approach any lending institution, do your research and ensure you know your business well. Knowing the above misconceptions and understanding the facts will help you on your way to getting a business loan as you take your business to the next level.

Categories: Finance