8 Business Loan Myths Busted

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, this new breed of business lender can analyse your finances and other factors online to give you an answer. 

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 regulations for deposit-taking institutions (ADIs), they can be more flexible in their lending decisions. 

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 seven minutes to complete. Your finances are safely and securely analysed online to determine if you are approved for a 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. 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.

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 (if you are seen as capable of making repayments). 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.

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.

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 time-limited opportunity, you might have to go with a higher interest rate loan from a non-bank lender. More specifically, let’s say you have an 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. 

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.

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.

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.

For a comprehensive overview of business finance options, see The Complete Guide to Business Loans.