Misconceptions about small business loans

Misconceptions about small business loans can limit growth opportunities. Access flexible loan options, including solutions for businesses with bad credit or those seeking large amounts.

Misunderstanding business loans can limit opportunities for growth and innovation. Let’s break down six common myths surrounding small business loans and correct them with facts that could help business owners make better financial decisions.

Banks are the only option

One of the most common myths is that banks are the only source of loans for businesses. While banks remain a prominent option, the rise of non-bank lenders has opened the market significantly. Alternative lenders, including online lending platforms, can often provide more flexible loan terms and faster approvals. This has become particularly useful for small businesses, where quick access to funds is crucial.

Alternative lenders consider a range of factors beyond traditional credit scores, such as business cash flow and revenue, when assessing loan applications. This flexibility can be especially beneficial for new businesses or those with lower credit scores. Online lenders often streamline the process with quicker applications, and they provide diverse products that suit different types of businesses.

The benefits of alternative lending:

• Quicker application processes
• A broader range of eligibility criteria
• Flexibility in loan amounts and repayment terms
• More personal customer service experience

As more businesses turn to alternative finance options, the competitive lending market ensures that both traditional banks and non-bank lenders offer competitive rates and tailored solutions.

Loans are only for struggling businesses

Many business owners mistakenly believe that loans are primarily for companies in distress. In reality, loans are widely used to support healthy growth. Expanding a business, investing in new equipment, or hiring more staff often requires significant capital, and loans are a practical means of funding these developments.

For instance, growing businesses often use loans to:

• Fund expansions, such as opening new locations
• Purchase new machinery or technology
• Increase inventory to meet rising demand
• Finance new marketing campaigns to reach wider audiences
• Hire staff or invest in staff training programs

These types of investments are not about saving a business from failure, but rather enabling a business to seize growth opportunities. Businesses with stable cash flow often use strategic borrowing to finance these growth initiatives.

Interest makes loans unaffordable

The idea that interest rates make loans unaffordable discourages many business owners from seeking external finance. While interest is certainly a cost that must be considered, it is often outweighed by the benefits of securing funding. For instance, if a loan allows a business to expand or improve profitability, the increased revenue can far surpass the cost of the interest.

Moreover, interest on business loans is often tax-deductible, reducing the effective cost of borrowing. Some lenders only charge interest on the amount withdrawn, and there are often options for early repayment to minimise interest payments. It’s essential for businesses to assess the potential return on investment (ROI) rather than focusing solely on interest rates.

Loan applications are always time-consuming

Another major myth is that loan applications always involve long, cumbersome processes. While this may have been true in the past, today’s technology has made the application process much more efficient, especially with the rise of alternative and online lenders.

Many online lenders offer streamlined applications that can be completed within hours. With the use of technology, they can access the necessary financial information instantly, often providing a same-day decision. Traditional banks are also improving their systems, offering faster and more user-friendly application processes.

Online tools have simplified the way businesses can apply for loans. For many, the process can be completed in a few steps:

• Filling out an online form with business details
• Uploading financial statements and other required documents
• Receiving a decision within a short timeframe

While some businesses may still prefer the traditional banking route, alternative lenders provide a more efficient and convenient experience for many borrowers.

Bad credit automatically disqualifies you

Business owners often believe that if they have bad credit, they won’t be able to secure a loan. While credit scores remain an important factor for many lenders, it is by no means the only criterion used to assess applications. Many alternative lenders look at a broader picture of a business’s financial health, such as cash flow, revenue, and overall business performance.

Some lenders specialise in providing loans to businesses with lower credit scores, particularly when the business shows strong cash flow or has a solid business plan in place. Business owners should consider alternative lenders or programs designed to help those with imperfect credit access funding.

In addition, many lenders now offer “credit-building” loans, which allow businesses with poor credit to start borrowing small amounts, repay successfully, and gradually improve their credit score.

Higher loan amounts are less likely to be approved

It’s a common misconception that asking for a larger loan amount makes approval less likely. In reality, lenders are more interested in a business’s ability to repay the loan than the specific amount being requested. As long as a business has the financial capacity to manage the repayments, requesting a higher loan amount does not necessarily harm the application’s success.

In fact, under-borrowing can sometimes be a problem. Businesses should carefully assess their financial needs and ensure they are asking for the right amount to cover their goals. It’s vital to justify the loan request with a detailed plan that shows the funds will be used for profitable activities that will help the business grow.

You need perfect credit to get a loan

While credit scores play a role, having a less-than-perfect score doesn’t automatically disqualify you from obtaining a loan. Many alternative lenders evaluate other factors, such as cash flow, revenue, and overall financial health, making it possible for businesses with lower credit scores to still access funding. Additionally, some lenders offer credit-building loans designed to help businesses improve their scores while gaining access to capital.

Small businesses don’t qualify for large loans

Many small business owners believe that lenders will not approve large loan amounts for smaller companies. In reality, lenders assess the business’s capacity to repay the loan rather than its size. If the business has stable cash flow and a strong business plan, applying for a larger loan can be feasible. In fact, some lenders may prefer higher loan amounts, as it increases their profit margins.

You must have collateral to secure a loan

Contrary to popular belief, not all business loans require collateral. While secured loans do exist, unsecured loans are available as well. These loans rely on the business’s financial health, cash flow, and overall performance instead of physical assets. This flexibility is particularly helpful for new businesses or startups that may not yet own valuable assets.

Applying for loans will hurt your credit

Many business owners fear that applying for multiple loans will damage their credit score. While it’s true that multiple hard credit inquiries can impact your score, some lenders offer pre-qualification processes that involve a “soft” credit check, which doesn’t affect your credit score. By carefully selecting lenders and limiting unnecessary applications, businesses can avoid significant credit impacts.

Loan repayments are inflexible

Business owners may avoid loans under the misconception that repayment terms are rigid. Many lenders offer flexible repayment options tailored to a business’s cash flow, including early repayment options or extended terms. Discussing the available terms with your lender can help ensure that the repayment schedule aligns with your business’s financial situation​.

Further questions

This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.