“I heard that I have to borrow at least $50,000 to even be considered for small business loans. My small business doesn’t need that much cash, and I can’t afford those loan payments!”
“My dad said I should apply for a loan from the bank down the street. They turned me down, so I guess I can’t keep my restaurant open after all.”
At Fundera, we spend a lot of time talking to small business owners. In many of these conversations, we find we’re having to dispel, over and over, some commonly held beliefs about business lending that simply aren’t true.
Whether born from the rumors of naysayers or from well-intentioned mentors with advice that is out of date, there’s a lot of misinformation circulating about the current small business lending climate. Today we’re going to bust the top five most common myths about business borrowing.
This used to be the case, and it was a big problem for small business owners— especially once the great recession hit hard in 2007 and traditional banks left the small business lending industry in droves. For a while, it was practically impossible to attain a loan as an entrepreneur.
But the small business financing landscape has changed dramatically in recent years. While traditional banks were once the only game in town, they’ve been largely replaced by online alternative lenders. And these new lending sources have vastly different processes and standards for servicing loans to small businesses.
This myth, born out of the scarcity of traditional bank loans, can still be confusing for many borrowers. Just how important is that magical credit score? Should you even bother applying for a loan if your credit is not-so-great?
The truth is, alternative lenders will still be considering your credit score among your borrowing qualifications. So if yours isn’t stellar—anything less than 600—take steps to improve and prepare to explain any irregularities. But other factors, such as your business’s age, annual revenue, and cash on hand, are equally considered by alternative lenders when servicing loans.
These lenders are smart and innovative, and they understand that the credit scoring algorithm isn’t a perfect indicator of a business owner’s ability to repay. If you can prove the viability of your business in the other areas—and especially if you can offer collateral such as your home or other property—the stigma of poor credit can be overcome.
Borrowing capital was once difficult for business owners caught in the middle of the lending scheme—those who needed more cash than they had on hand, but not enough to be worth the costs for the larger loans banks were making. At that point, high interest business credit cards were often the only option for entrepreneurs needing credit to grow their business.
Enter the Small Business Administration’s Microloan program. Started in 1992 and growing exponentially in recent years, the Microloan program was specifically designed to service entrepreneurs who were wanting smaller loan amounts.
Whereas some traditional term loans have comparatively high minimum borrowing amounts, microloans service borrowers for a maximum of $50,000. Average microloans are closer to $13,000, with some intermediaries offering loans for as little as $500.
With traditional loans, borrowers are forced to come up with the same monthly loan payment every 30 days, regardless of cash on hand or how business is doing. That can be a big problem for borrowers with seasonal businesses or otherwise irregular cash flow.
Fortunately, alternative lenders have created new options for these businesses. With something like merchant cash advance, loan principal is repaid through a fixed percentage of daily sales. That way the borrower pays more when sales volume is high, but isn’t counting pennies to make loan payments during slower sales periods. Another popular product is the short-term loan, which is paid off with daily payments over a short period of time (as little as 3 months).
If you last applied for a business loan 20 years ago—or are getting business advice from your parents—you might assume it will take weeks or even months to secure a loan. But the lending industry has come a long way since the days of showing up to a brick and mortar bank in a business suit with 12 pounds of paperwork.
In reality, most small business owners can complete an online loan application in less than an hour, and you can often have cash in hand to grow your business in as little as two days! In some cases, entrepreneurs need additional time to gather necessary data, such as past balance sheets or bank statements—but very rarely is funding approval held up on the side of the lender.
With the alternative lending industry evolving so quickly, it’s easy for business owners to be misinformed about current options and borrowing standards. So consult a funding advisor to get the real story about your company’s likelihood of qualifying for a small business loan.