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8 Small Business Loan Myths Busted – Clearing Up the Myths About Business Loans

business loan myths

Several misconceptions about small business loans can hold people back when they are looking for business finance. Here we'll take a closer look at these business loan myths and why they don’t stand up.

Business Loan Myth #1 – It takes a long time to get a business loan

Not necessarily. It depends on the lender and the type of loan. While a traditional term loan from a bank can take up to two months to get approved, an unsecured business loan from a fintech lender can be approved within 24 hours of receiving the application. This is because online lenders have automated much of the process to make it quick and simple. Instead of completing stacks of paperwork, fintech lenders can analyse your finances and other factors online to give you an answer. There are also other types of business loans that are approved within short timeframes, including business overdrafts and lines of credit. So although getting a traditional bank term loan can take some time, there are other options that are much faster.

Business Loan Myth #2 – You need to go to a bank to get a business loan

False. Although banks are often the first stop for business owners seeking finance, a range of non-bank lenders offers business finance. For example, fintech lenders use technology that makes it easy to apply for business loans online. Since they don’t fall under banking regulations, they can be more flexible in who they offer loans to. In addition to fintech lenders, other non-bank lenders specialise in different types of finance. Examples of business finance offered by specialist lenders include invoice finance, equipment finance and merchant cash advances.

Business Loan Myth #3 – You need to complete a large amount of paperwork to get a business loan

False. This only applies to some loans. If you apply for a bank term loan, for example, you will be required to complete a large amount of paperwork. In some cases, a bank might require that you complete a business plan. If you are applying for an unsecured loan online, there will be very little paperwork as most of the process is automated. With Moula, for example, the application takes around ten minutes to complete. Your finances are safely and securely analysed online to determine if you are approved for a loan.

Besides unsecured business loans, other types of finance don’t require you to complete a large amount of paperwork. For example, with invoice finance, the lender will want to see the outstanding invoices before approving a loan. In this case, the invoices act as collateral. Another quick form a business finance that doesn’t require large amounts of paperwork is a merchant cash advance. With this form a finance, the lender is repaid with a portion of all credit card sales.

Business Loan Myth #4 – You need a business plan to get a business loan

Usually not. In some cases, especially if you have a new business, you will need a business plan for a bank term loan. For most other business loans, you won’t need a business plan. Although a business plan is not required for many types of business loans, it’s still a good idea to create a business plan, especially when you are starting out. Writing a business plan forces you to think about your business and do the research. Experts say that a business plan should be updated regularly to reflect changes in the business and the market. Read How to Write a Business Plan When Applying for a Business Loan.

Business Loan Myth #5 – You will get rejected for a business loan if you ask for too much

Lenders don’t base their decision on how much you request as long as they believe you will be able to repay the loan. With the time and resources lenders need to set-up a loan, it is more profitable for them to lend you more. When making a decision they will look at your overall financial position and how you plan to use the money. If you ask for too little and are not able to fulfil a project that will generate a return on investment, you might not be able to pay off the loan.

For example, if you are a manufacturer and you win a large contract to supply a major retailer, you will want to increase your capacity to fulfil this new demand. If you ask for too little and can’t get the equipment, premises and staff needed to meet your expanded requirements, your clients could end up dropping you as a supplier. In this case, you will want a loan that covers your total requirements.

If you have a particular project in mind and want to calculate return on investment, use our ROI Calculator. It has been designed to calculate return on investment on inventory, equipment and marketing.

Business Loan Myth #6 – You need a perfect credit score to get a business loan

Your credit score and history are important factors in determining your eligibility for a business loan. This is especially true if you are seeking a loan from a bank. Non-bank lenders will also consider your credit score and history but, unlike banks, they are not as constrained when making loans. Besides considering your credit score, alternative lenders look at other factors including time in business, how your business is performing, your cash flow and your industry. If your business fundamentals are strong, you will probably be able to find some type of finance even if you don’t have a perfect credit score.

Business Loan Myth #7 – The interest rate is the most important aspect of a business loan

While the interest rate is one of the factors to consider, there are many other points to keep in mind when choosing a business loan. It all will depend on the circumstances and the reasons for taking out the loan.

For example, if you need funds fast for a timely opportunity, you might have to go with higher interest rate loan from a non-bank lender. More specifically, let’s say you have a limited opportunity to purchase inventory at a large discount. If you approach a bank for a loan, you would get a better interest rate but it would take too long to get the funds. You could quickly get the funds with an unsecured loan from a non-bank lender, such as a fintech. Although the interest rate is higher, you believe that you will be able to make a healthy return on investment. In this case, it makes sense to get a higher interest loan so you can take advantage of a good deal.

Another point to consider is the overall interest paid. If you take out a long-term loan with a low interest rate, you could still pay more interest than with a short-term loan at a higher interest rate.

Business Loan Myth #8 – You need collateral to get a business loan

For some business loans, you need collateral. These are called secured business loans. For example, a bank term loan will require collateral, such as a residential or commercial property. Some types of loans are available in secured and unsecured versions for instance, a business line of credit. The major difference for the borrower is that the unsecured version will have a higher interest rate, around 1.5 times greater. This is because there is more risk for the lender with an unsecured business loan. If the loan is secured with collateral, the lender can sell it to pay what it is owed.

Some loans are self-secured with the item that has been purchased. For example, with equipment finance, the equipment purchased can serve as collateral until the loan is repaid.

With unsecured business finance, there is no collateral attached to the loan. One example is online loans from fintech lenders such as Moula. As unsecured loans, no collateral is required.

However, the borrower or a guarantor is required to sign a personal guarantee. So eventually, their assets could be at risk if there is a loan default.

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All the thoughts, ideas and musings from the Moula team! Covering everything from work/life balance to general finance tips plus everything in between!

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