Busting 6 Common Myths About Small Business Loans
By Mike Plotnick, Staples® Contributing Writer
Even the most successful business owners may find themselves strapped for cash and needing a small business loan to expand operations, fund a capital investment or address a cash-flow shortfall.
Despite an abundance of resources to help small businesses navigate the lending landscape, the borrowing process remains shrouded in mystery for many.
We asked financial and business experts to clear up six misconceptions about small business lending.
1. Banks are the only source of loans for small businesses.
Though traditional banks and credit unions provide the bulk of small business loans, a wide variety of alternative lenders, including Staples Business Loans powered by Lendio, make funding available in a fraction of the time.
Business owners should evaluate all available financing options before accepting a loan offer, urges Brock Blake, founder and CEO of Lendio in South Jordan, UT.
“Every lender offers different terms, which often makes it difficult to compare apples to apples,” he says. “Finding the right loan that addresses business needs and the current financial situation may require the experience and expertise of someone who works in the space every day and can help navigate the pros and cons of any loan offer.”
2. You must have perfect credit to qualify for a loan.
Credit score — both business and personal — is the top factor used by traditional and alternative lenders to determine whether a business qualifies for a loan. Your score provides a quick assessment of how you’ve paid bills in the past, which can indicate how you’ll pay them in the future.
“If the credit score is less than perfect, they should spend the time needed to improve the score,” Blake says. “In as little as six months of consistently making payments on time and judiciously using credit, business owners can improve their score by as much as 100 points.”
When your credit score is too low to secure a traditional loan, an alternative lender may be willing to provide a small loan while you rebuild your credit.
3. The process is long and cumbersome.
Fear of the unknown often prevents business owners from even exploring their options, says Kristin King, vice president and government-guaranteed lending specialist at Rockford Bank & Trust in Rockford, IL.
“A lot of small business owners delay the loan process because they think it’s going to be difficult or take too long,” she says. “So they fund their business with credit cards, or they deplete all of their personal net worth until they’re desperate. But the longer they wait, the harder it is for us to help them.”
The U.S. Small Business Administration recently simplified its loan application and underwriting process, which means that borrowers can secure an SBA loan in about the same time as a conventional loan.
4. You can apply directly to the SBA for a loan.
Because the SBA doesn’t lend money directly, business owners must apply for these loans through SBA–approved lenders, which include banks, credit unions and non-bank lenders.
To streamline the SBA loan process, Blair Koch, CEO of the Denver West franchise of The Alternative Board and a business-coaching consultant, advises business owners to make sure they are interacting with key decision makers at the lending institution.
“If you’re dealing with a salesperson, you’re likely to be strung along until a decision maker sees the complete package and then potentially says no,” she says. “Meanwhile, the business has wasted valuable time and resources.”
5. The more money you ask for, the less likely you are to get approved.
Though it may be true in some cases, this isn’t an ironclad fact. Lenders consider numerous factors — including available collateral, cash flow and revenue projections — before deciding whether or not to approve a loan request.
That’s why King says it’s important to realistically assess the amount of funding required.
“Not asking for the right loan amount is a common mistake I see,” she says. “A borrower who wants to purchase some new equipment may not have considered that they probably also need a little bit of working capital or might need to purchase additional inventory.”
If that pushes the loan amount beyond the bank’s comfort zone, it doesn’t mean you’re out of luck. Ask about a shorter-term loan with an option to renew at a potentially higher rate when you pay off the first one. This may make it easier to leverage funding from another source.
6. Only struggling businesses should apply for a loan.
Many highly successful business owners pursue a small business loan to support expansion plans or operational improvements or to serve as a temporary financial bridge during a challenging season.
In fact, financial specialists agree that the time to prepare for a loan is before you need one. “It’s a lot like learning how to swim before the boat sinks,” Blake says.
Thankfully, you don’t need to be a financing genius to make sense of the temporary funding alternatives available for small businesses.