5 Myths of Small Business Loans
Need a business loan? If you’re already setting up camp outside your neighborhood bank and losing sleep over your credit score, it may be time for a reality check on what is—and isn’t—involved in the modern-day process of applying for a business loan. Before you waste any more time, make sure you aren’t falling for any of these five common misconceptions:
1. THE MORE YOU ASK FOR, THE WORSE YOUR CHANCES
A lot of people believe that the worst thing you can do when applying for a loan is ask for too much money. While this logic certainly holds true if you’re borrowing money for lunch from a friend, your bank or lender isn’t going to care so much about the amount of the loan as they are about the appropriateness of the amount. Ask for too much and you’ll look like an incompetent business owner who is out of touch with the reality of his or her business; ask for too little and you’ll risk having to re-apply all over again when the funds from the first loan run out. At the end of the day, all your lender wants is to be paid back (with interest, of course); the amount you ask for really doesn’t matter as long as you can show that you’ll be able to pay it off.
2. THE BANK IS YOUR ONLY OPTION
If your first impulse when you need a loan is to run to the bank, you may want to reconsider. Depending on your type of business, the industry you are in, the amount of revenue your business currently has, and the amount of money you need to borrow, seeking out a loan from a bank may not be the best option. Getting a loan from the bank is a slow and complicated process and is generally only worth it if you are looking to borrow a large amount of money (over $250K) over a longer period of time with low interest rates. Banks look to lend to established businesses that already have revenue and stable growth, so if you own a new business, have a lower credit score, or are looking to borrow a smaller amount of money, the bank probably is not your best bet.
Just because your business doesn’t fit the cookie-cutter ideal that banks are looking for doesn’t mean that you won’t be able to get a loan; other types of lenders (such as merchant cash advance companies, micro-lenders, credit unions, peer-to-peer networks, and commercial lenders) exist to assist small businesses with financial situations that banks would rather avoid. These types of lenders will, in general, be more willing to lend out small sums, overlook a poor personal credit score, change the amount of the loan with time if necessity demands it, and lend to businesses that are not yet raking in the revenue, albeit with higher interest rates than the bank.
3. IT’S AN ORDEAL
While banks are still notoriously slow to respond to requests, lenders such as commercial and merchant cash advance companies offer options for businesses that need access to capital now. You will still need to spend the time to prepare beforehand, but these types of companies usually have application processes that only take a few minutes, with loans being approved within hours and the money hitting your bank in as little as a day. Unlike the bank, which may require briefcases of business plans, financial statements, projections, etc., lending companies are usually focused on verifying monthly sales (by looking at your company’s bank account or credit card processing statements) before approving or denying your request. This translates over to less overall work for you, a faster response, and quicker access to your requested funds.
4. IT ALL DEPENDS ON CREDIT
Another pervasive myth is that only business owners with flawless credit go to the bank while only business owners with bad credit go to sources such as merchant cash advance companies. The reality is, of course, not nearly this black and white. While banks are generally more restrictive with regards to credit scores, both banks and other types of lenders will do business with individuals from both ends of the spectrum. Credit scores are not the be-all end-all for whether your business will be approved for a loan; usually a score of other factors will be looked at before the bank or loan company decides to lend to you.
The idea that non-bank lending sources place less weight on credit scores is primarily due to the fact that these loan companies usually look at a different (and usually wider) range of business health indicators than the bank. Some lending companies will look at traditional indicators such as the business’ cash flow, personal investment, performance over time, industry type, and the time spent in business, while others will take into account more creative sources, such as Yelp reviews, when determining business health. Don’t be mistaken; credit scores are somewhat important, but they aren’t usually the deciding factor for whether or not you will be approved for your loan.
5. THE DATA DECIDES
Given all of the numbers and algorithms involved in the lending process, it may seem like your lender is just using a calculator to determine whether to lend to you. However, the truth is that human interaction still plays a large role in the lending process. Most lenders will conduct some sort of interview before deciding to lend, and your answers to these questions may end up influencing their decision even more than your numbers. Whether you’re going to the bank or sitting on your computer at home, it’s incredibly important to be well prepared when applying for a loan. Consider writing up a business plan beforehand so you can prove to the lender that you’ve been thinking ahead, and be sure to have all of your financials handy.
Honesty and good communication are key all throughout the process; you want to be sure that you and your lender are always on the same page with regards to the details of the loan. If you find yourself unable to make a payment, just call your lender in advance, and you may be surprised at how willing your lender will be to help you come up with a new payment plan to avoid penalty fees and collections agencies. Contrary to popular belief, lenders actually want you to succeed, and they know that they are more likely to be paid back if their interactions with you stay pleasant and cooperative. If you make a good impression upfront by being open with your lender and communicating clearly, you have a far greater chance of being approved for your loan.
Taking out a small business loan may seem like a daunting idea, but the process is only as complicated as you let it be. Preparing beforehand is absolutely critical whether you’re asking for a loan from a bank or lending company, and you may be surprised at how simple the process can be if you’re organized and knowledgeable about your business. The right loan for your business is out there, and all you need to do is figure out how and where to get it.