Five Business Loan Myths That Could Be Holding Your Business Back
Securing funding can prove to be a daunting task for business owners. It’s often made even more challenging due to some widely believed myths about business financing and loans. In this article, we’ll dispel five of the most common business financing and loan myths and empower you with the knowledge you need to find the right financing for your business.
Myth #1: All business loans are created equal.
Business financing options vary widely in terms of funding amounts, interest rates, repayment terms, collateral required, and qualifications you must meet to be eligible. Different loan structures serve businesses based on their individual needs. An established business with strong cash flow may qualify for a conventional business loan provided by their financial institution. Whereas, a business that is growing or needs to qualify based on projections could be funded through an SBA loan.
Unfortunately, some types of financing can also be a blessing and curse. Business owners that have leveraged Merchant Account Advances (MCAs), sometimes called merchant loans, often describe them as a double-edged sword. Merchant Account Advances provide a lump sum of money in exchange for a percentage of future revenue—usually collected by debiting a portion of the business’s credit card revenue, or by making automated clearing house (ACH) withdrawals from the business’s merchant account or bank account. While MCAs may seem like an easy way to get funds, there is a long list of drawbacks, including high fees, confusing contracts, and an effective annual percentage rate (APR) that can reach up to 350% or higher. Because MCAs are not regulated at the federal level, business owners can be left susceptible to debt cycles/debt traps.
The other negative effect is that this type of funding often deprives the business owner of a one-on-one business banking relationship with a loan officer who can help them explore a full range of financial tools to support their future growth.
Myth #2: To get a business loan you need perfect credit.
While it’s true that a good credit score can make getting a business loan easier, less-than-perfect credit isn’t necessarily a deal-breaker. Most lenders look at multiple factors including how your business has been performing, your cash flow position, and even your personal track record of paying your bills on time.
The Small Business Administration (SBA) works with financial institutions to facilitate working capital loans that can provide up to $150,000 in financing. These loans are designed to help small businesses access needed cash to meet short-term operating expenses, including payroll, office rent, utilities and other everyday costs of doing business. Working capital loans can also be used to:
• Cover the cost of hiring additional employees or training existing staff
• Purchase inventory or supplies
• Pay for marketing and advertising
• Upgrade equipment or invest in new technology
The great thing is that SBA-backed working capital loans are easier to obtain than other loan types. So what do you need to qualify for one? According to Cooper Perkett, Commercial Loan Officer at First Utah Bank, there are a few must-haves, which include:
• Your small business has 500 or fewer employees
• You’ve been in business for at least 2 years (and have two full years of federal tax returns)
• Your business has maintained a daily balance of at least $10,000 in your account for the past 90 days
• You have a business credit score (it doesn’t have to be perfect)
Perkett says that lenders also look at factors such as whether the loan request will help grow your business, and whether you have a business and personal track record of paying bills on time. While credit scores are important, SBA-backed loans offer lenders much more leeway and flexibility in considering the overall creditworthiness of the business. The takeaway: perfection is not required to get financing for your business.
Myth #3: It’s more difficult to get a business loan from a bank than a credit union.
Many years ago, credit unions were mostly small and focused in one geographic area, or required certain work, residential or occupational requirements to join. Nowadays, many credit unions are large, regional financial institutions that are just as large as some banks.
Local banks—especially community banks—are great options for small and medium-sized businesses (SMBs) that need financing. Since community banks are usually locally owned and operated, they tend to focus on the needs of the businesses in the state or area where the bank’s branches and offices are located. This also means that lending decisions are made by people who understand the needs of local businesses.
Community banks like First Utah Bank, which are part of the SBA’s Preferred Lenders Program (PLP), can approve SBA loan requests locally and in-house (without waiting for SBA approval). This often saves business owners time and enables the release of the funds sooner.
Myth #4: It’s a long process to apply for or even find out if I qualify for a business loan
As busy as many business owners are, this myth may be the biggest deterrent to businesses getting much-needed financing.
The fact is, if you reach out to your local financial institution, many loan officers can ask you a short series of basic questions and give you a pretty good idea of what type of loan you may qualify for. Working one-on-one with a loan officer will help you determine what type of business loan would best suit your needs. The loan officer can also give you an idea of how much money you might be able to borrow and answer any questions about the types of documents that you would need to submit to apply.
While some types of loans take longer than others to process, some SBA-backed loans, such as working capital loans, can be processed in as little as two weeks.
Myth #5: Successful businesses don’t need loans.
While business financing can be used to grow a business or provide funding for day-to-day expenses, it’s an equally powerful tool for businesses that are booming. Proper funding empowers a business to take advantage of unexpected opportunities or improve its market position. Funding makes it possible for growing businesses to grow faster by purchasing a competitor, opening additional locations or starting a new product or service line.
Business debt refinance loans can also improve your business’s financial situation by replacing existing debt obligations with a new loan that better fits your financial needs. This is a great idea for businesses that received funding when their credit was less than perfect and now want the lower interest rates that come with a better credit profile. It’s also a great option for companies that just need to free up additional capital.
The right financing is the key to growing your business
The proper business loan can help you expand your business, weather challenging market conditions or take advantage of time-sensitive opportunities. Learn what’s possible for your business. Explore a banking relationship with the local financial institution of your choice.