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The Biggest Business Financing Myths Out There

ByMeredith Wood,
business.com writer
|
Nov 29, 2018
Home
> Finance
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Don't believe these common myths about business loans.

With business financing, it's often tough to separate fact from fiction. The small business loan process can feel intimidating, complicated, and downright scary for a first-timer or a new business owner. As with most types of financing, specifics of business funding can differ between applicants, which makes it tough to get the lowdown on what you might expect for your business.

To paraphrase an old saying, a myth can spread halfway around the world while the truth puts on its shoes. Anecdotal evidence from other entrepreneurs can be helpful, but it may not apply to you and your specific needs. Here are a few of the biggest financing myths out there.

Editor's note: Looking for the right loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

 

1. You have to have perfect credit.

This is one of the bigger business financing myths out there – that entrepreneurs have to have a spotless credit history to qualify for a small business loan. Although good credit certainly improves your odds of getting a loan, you don't need a squeaky-clean credit history just to get your loan application noticed.

The truth is, your credit score requirement varies depending on the kind of loan you're after. Small Business Association (SBA) microloans, for example, often approve applicants with less-than-stellar credit. Short-term loans tend to be more generous with their credit requirements as well, with many lenders targeting scores of 550 and above.

All that said, your credit will come into play when applying for business financing, so it's a good idea to start taking steps to improve your score if you want to secure the best financing possible.  

2. You can only finance large amounts of money.  

Many small business owners incorrectly assume that business financing is only appropriate for applicants who need a lot of money to fund their growth. Though traditional banks tend to prefer larger loans that are worth their time and investment, there are many microloan options out there that work for small business owners who need more cash than they have on hand.

For example, the SBA Microloan Program offers amounts up to $50,000, with averages falling closer to $13,000. Some SBA intermediaries even offer microloans for amounts as low as $500. If you don't need a big loan, there's no reason you should take one out. There are options for business owners who require smaller amounts of capital to meet their needs.

3. Getting a business loan will take months and months.   

Sometimes you can plan ahead and submit your business loan application months before you actually need the cash in hand. But for those instances where you need the capital fast, a business loan is out of the question – right? Wrong.

Years ago, the only way to secure business financing was to compile endless records, head to your local bank and wait weeks (or months) to see a dime. These days, a small business owner can complete an application for many lenders online in under an hour and see the cash in as little as a couple of days. Though you may need a little extra time to produce necessary documents such as balance sheets or bank statements, many alternative lenders specialize in funding small business owners quickly when they need the money.

4. You have to offer collateral to get business financing.

Collateral can be a scary part of the borrowing process for some small business owners. After all, you're taking out a loan because money is tight in the first place, so tying up some of the capital you have in a loan seems almost self-defeating.

Although many loans do require you to offer collateral in exchange for financing, that's not true for every kind of loan. There are plenty of small business loans with no collateral requirements, such as unsecured business loans, unsecured business lines of credit, merchant cash advances and business credit cards. None of these options require you to put up collateral to get access to cash. Instead, your lender may ask for a personal guarantee, which is another way of saying that you'll be personally responsible for paying back what your business owes. If your business misses payments or defaults on its loans, the people who signed on the loan will have to cover the balance out of their own pockets. This might be a worthy trade-off for you, depending on your business's financial position.

5. All business financing options are alike.

Business loans aren't quite like snowflakes, but they're definitely not cookie-cutter either. Loans vary on a case-by-case basis: Your business needs, finances, credit history and plans for the funds all factor into the loan offer lenders will provide. A loan that helps you purchase inventory will come with different terms and conditions than, say, a loan to roll out a huge new marketing campaign.

Lenders pay attention to specific risk factors before they make you an offer. The terms you end up getting depend largely on your own financials and your intentions for the money you're borrowing. The best thing you can do as a borrower is to enter the process with as much information about your business as possible and to be prepared to answer questions about why you want the money in the first place.

6. You can't get a loan to start a business.

It's often easier for existing businesses to get loan approval, since they have a longer financial track record and credit history. But that doesn't mean lenders don't open the vault for brand-new businesses.

The SBA Microloan Program is startup-friendly and offers business loans up to $50,000. Because the SBA partially guarantees the loan, lenders are incentivized to take on riskier applicants than they may otherwise have considered. Equipment loans are also a great option for startup financing, as they don't require collateral or nearly as long a credit history to get approval. Last but not least, a business credit card can provide new business owners access to working capital, even if they haven't been in business for a long time.

No matter what your small business financing needs are, there's an option out there that's right for you. Before you set out to finance your business, do your homework, know your business inside out, and don't be afraid to reach out to professionals for help. Do this, and you'll be on your way to getting the cash you need to take on the next step of your entrepreneurial journey.

Meredith Wood
Meredith Wood
See Meredith Wood's Profile
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Learn more at www.fundera.com
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