7 Common Myths About Business Loans Debunked

Businesses often can’t get off the ground without loans – however, the road to your ideal business loan is often hindered by misconceptions. You may have heard that loans are just for big businesses, or you’ll need extensive collateral to secure a loan, but these myths are far from the truth. Read on to learn a bit more about how to make the process of getting a small business loan a little easier.

Myth #1: Business Loans Are Only for Big Companies

Loans can be large and small, and whether you’re a small business owner or working for a larger corporation, these financial tools can work for you. Small businesses are vital to the economy, and as a result, there are numerous loan options that cater specifically to these needs. Think of startup costs, expansion initiatives, working capital shortages, and essential equipment purchases – many business owners can’t afford these things on their own.

Options range from Small Business Administration (SBA-backed) loans, which offer favorable terms through government guarantees, to traditional bank loans. Online lenders can provide faster access to updates, and credit unions are known for personalized service, as they’re much more like the small businesses they’re catering to. Community Development Financial Institutions (CDFIs) also primarily function to support underserved businesses.

Myth #2: You Need Perfect Credit to Get a Loan

Business loans are, in fact, still accessible to those with less-than-perfect credit. Lenders will certainly evaluate credit scores to assess whether a borrower can pay back their debts. A business owner’s personal and business finances will be examined, alongside their business plan that ideally demonstrates viability and repayment capability. The SBA’s main type of loan, 7(a) loans, usually require over a 680 credit score – higher than conventional loans. However, depending on the type of SBA-backed loan, the credit score requirement may vary.

Myth #3: Banks Are the Only Lenders Available

Small businesses have a number of financing options beyond banks. Government programs, in addition to SBA loans, provide specialized funding opportunities. These can include state-level initiatives, grants targeted at specific industries or demographics, and programs designed to support businesses in economically disadvantaged areas. Check the SBA website to learn more about what small business loans might be a good fit for you.

Myth #4: You Can’t Get a Loan if Your Business Is New

Startups and new businesses, even if you lack a substantial financial history, have specialized loan options. One option is microloans, offered by organizations like the SBA’s microloan program and CDFIs – with the SBA, the only requirement is that your business is for-profit and operates out of the US. These provide smaller loan amounts suitable for initial expenses. Some online lenders also cater to startups. They focus on factors beyond traditional credit scores, such as the strength of the business plan and projected revenue. Some also use personal loans from the founders themselves, though these should be approached with clear agreements.

Myth #5: Business Loans Take Too Long to Secure

While traditional bank loans or SBA-backed loans can involve extensive paperwork and approval timelines, there are some quicker options. Online lenders, for example, often offer streamlined applications and funding within days, or even hours, for certain loan types. Similarly, some microloans and short-term financing solutions prioritize speed, enabling businesses to access capital rapidly for urgent needs.

Myth #6: Business Loan Interest Rates are Always High

Just like some loans are for small businesses and others are for large businesses, they come with a wide spectrum of interest rates and repayment terms. These are influenced by the lender and the specific loan type. Traditional banks, online lenders, and government-backed programs each offer varying rates based on factors like the borrower’s credit, the loan amount, and any potential collateral provided, if needed. Short-term loans might have higher interest rates but shorter repayment periods, while SBA loans may have lower rates with extended terms.

Myth #7: You Must Have Collateral to Get a Loan

While some lenders and loan types (namely, secured loans) require collateral to mitigate their risk, you can also get a loan without tangible assets to pledge. Unsecured loans are available through certain online lender offerings, some SBA loan programs, or business lines of credit. These loans rely on the borrower’s promise to repay, rather than a physical asset, and borrowers must demonstrate that access to capital is possible even without collateral.

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