Besides financial help, quite a few entrepreneurs accounting for financial assistance must also consider it part of starting or growing a business, and, naturally, business loans are also a route. However, the truth is packed with an unimaginable number of myths and illusions regarding business loans, which will turn someone away from seeking a loan in the first place. Awareness of these myths and how to debunk them gives you, the account holder, the authority to make informed decisions for your business regarding how you may finance it.
In this blog, we’ll tackle the 10 most common myths about business loans and provide the facts you need to approach the lending process confidently.
1. Great credit is the only road to getting a business loan.
[I] It is also a gross fallacy to claim that credit bureau scores for a business loan are not required. Although a high credit score is an advantage, it is certainly far from being a hard requirement for most business loans. Lenders consider not only the financial soundness of your business (turnover and cash management, etc.) but also the financial soundness of your business.
Even with a poor credit history, micro/small businesses or start-up businesses, etc., can obtain loans from alternative lenders (i.e. e.g., online lenders or microloans) and also an illustration of lending that does not include a strict loan set of conditions. For instance, government-sponsored loans, e.g., via the Small Business Administration (SBA) - SBA also has more lenient eligibility standards.
The truth is that credit score is essential. Still, it is not the only criterion among the different data combinations the lender will use when deciding whether to approve a loan application.
2. Business Loans Are Only for Large Corporations
There is a wide misconception among entrepreneurs that business loans are only available for large companies or large enterprises (i.e... Business loans can be used for any business, including small businesses, startups, or anything else. Unsurprisingly, FLN (financial literacy, netiquette, and noncommercial practice) organizations offer product packages for small enterprises containing microloans and small business administration "SBA" supported loans, e.g.
The truth is that business loans can be obtained by any size business, including small and medium-sized enterprises (SMEs) and startups.
3. Business Loans Are Only for Emergencies or Expansions
The most pervasive error is that business loans are only for companies in dire need or expansion mode. Although loans may be extended to cover these purposes, they may also be used to cover operating expenses, equipment or goods, marketing, or debt refinancing.
Recovering from, e.g., shock loss or damage, via undertaking loans for operating expenses, e.g., or loanable to improve the business can provide a firm based on its scale to grow and good management stability, i.e., as the loan is cl. Aimed as an efficient and well-considered use of the capital.
Business loan applications can also be used for purposes other than emergencies and expansion, such as operational expenses and expansion financing.
4. The Loan Approval Process Takes Forever
Most entrepreneurs perceive the business loan application as a long and cumbersome process. Locating all required papers and processing the loan application takes time. However, using Internet lenders and alternative finance, e-loan approval processes have been short-circuited. In particular, specific online lenders have the potential to verify a loan in approximately one day and a half and are thus a much quicker alternative to banks.
The Truth is approval time may vary, but expedited approval is available for many online funders, and the process may seem extremely fast.
5. You Need Collateral for Every Business Loan
Even though it is not the rule, some loans are underwritten with collateral (equipment, real estate, or inventor) for business loans. For example, unsecured loans do not acquire collateral. Still, they may be linked with a lower quality of asset protection and, therefore, a higher interest rate–an effect of the risk of the loan that is greater from the lender's point of view. In addition, SBA loans can offer financing with zero personal guarantee and/or significant collateral.
The Truth is not all business loans require collateral. Unsecured loans and certain government-backed loans offer collateral-free options.
6. If interest rates are high, then the loans should be small, but the outcome is never that the size of the loans is automatically large.
Interest rate is considered in loan appraisal, but it is not necessarily true that if an interest rate is high, it does not equal an alarming loan rate. On the one hand e.g., the rate of interest on a very short-term loan may be higher if the time to pay it back is shorter, and so on. For instance, the rates of return for the loans offered by alternative/online/nonbank/lenders are generally much higher to account for the added risk and the speed of the approval process.
However, the most common question is how to determine whether a loan's interest could cover your business's value. Unfortunately, a very high-interest loan, essentially capitalizing on operation expansion or improvement, can still be a worthwhile investment.
The Truth is that it is not automatic to conclude that a loan will be a poor decision just because the interest rates are high. The cost of the final loan should be considered, as should the value that the loan brings to your business.
7. Only Banks Offer Business Loans
Although commercial banks are companies' most common financing providers, they are not the only financiers. Many companies can provide a more in-depth analysis of alternative lending options, including credit unions, online lenders, peer-to-peer lenders, and private entities. These creditors will be able to offer a faster decision timeframe, more flexibility, and possibly even an increase in the level of acceptance since the creditor's banks are not, i.e.
The Truth is banks are not the only source of business loans. Numerous alternative lenders and financing options are available.
8. Borrowing money for a business currently in the red will not be possible.
Some entrepreneurial types carry the notion that securing a loan is something to be avoided and considered only if the business is already profitable or during the dark days of a challenging, messy company chapter. It can be much easier for applying for a loan to make sense when the activity is profitable. Still, some funders can lend money to a lossmaking operation, particularly if a business plan for recovery can be described. For instance, lenders will consider in their lending decisions the future of your personal life, the future of your business model, and personal guarantees in the context of mitigating risk.
The Truth: But it is also true that this can be done even without yet having been profitable in this case, as long as a robust recovery plan is available.
9. You Must Have a Perfect Business Plan
Though, no doubt, it is beneficial and convenient for bankers to make it seem like a business plan is plausible, there is no need for a business plan to be thoroughly planned. Lenders are searching for a winning strategy and realize that entrepreneurs, especially startups, may no longer be conveniently able to produce all the answers to the questions they are asked to answer. In your business plan, the most important thing is to demonstrate where there is a pathway from loss to profit, what you plan to do with the loan, and how you plan to repay it.
There is undoubtedly an advantage to having an excellent business plan, although it is not strictly required. The viability of the plan on the lenders' side and the ability of the loan to be repaid are both taken into account.
10. Once You’re Approved, You Can’t Change Your Loan Terms
Some businesspersons believe (and believe that) even in the context of the current case, even if the application for the loan is approved, it is the end of the saga, and the other party disappears altogether. Nevertheless, there are different conditions negotiated on the side of the lending and the loan as it develops over time in its life cycle, whatever the lending institution's policy is and the nature of the loan. Particularly in case your financial status changes, if the payment of the expected monthly installment can be fulfilled, you could apply for the renegotiation of the payment scheme or a loan modification.
The Truth is loan terms are not always set in stone. It may, and it will depend on your lender (we look forward to options to modify the lending contract terms) depending on the various conditions.
Conclusion
Business loans can be very effective for small entrepreneurs wanting to grow or expand their businesses. However, myths and misunderstandings can lead to unreasonable anxiety or hesitation. Approaching the problem from the perspective of 10 cognitive biases, we try (or give you the information to) rationally apply a management decision in business lending.
There is no one-size-fits-all approach to business funding. Which loan type suits your business best, among many others, depends, for example, more on what the company is for a living, what loan type is available, and what your financial situation is like. Notwithstanding, if you are considering growing out, buying new equipment, or controlling cash flow, be careful of the following proverbs. You can avoid the pitfalls of the lending process and arrive at the best possible solution for your needs.
