With the increase of alternative lenders, there has been a distinct change to lending standards from just a couple of years ago. Now, it is much easier for small business owners to meet the criteria for a business loan, and it is also much easier for them to apply. You may be thinking you know all there is to know about small business loans, but you may be surprised.
If your business needs financing, right now or some time later on — here are 4 myths you should be wary of.
Myth #1. You will not be able to get a small business loan if you get rejected by a traditional bank
A long time ago, traditional brick-and-mortar banks were the only financing option that was available to businesses. So during that time, if you were denied a loan by a traditional bank, and your rich old aunt didn’t want to invest in your business, a denied loan application meant you had no other options. But it’s not like that these days.
After the 2008 financial crisis, lending standards were tightened up by big banks, which made it almost impossible for a small business owner to get the financing required. Thankfully, it didn’t take long for that financial void to be filled with new alternative lenders coming on board, who now provide small business owners with more financing options than they have ever had.
Myth #2. You must have a perfect credit score
This is still somewhat true — if you are applying for a traditional bank loan, your personal credit score is going to weigh in fairly heavily during the underwriting procedure. However, since today’s banks don’t just finance the owners of small businesses, a less-than-perfect credit score is not going to totally ruin your chance of getting the finances you need.
Just about all lenders still consider your credit score before they approve or deny your loan application. Some have more lenient standards, and some lenders even use real-time data to determine your credit score, like your Amazon Seller account, business checking account, QuickBooks, etc.
The credit score, however, still remains one of the key factors in loan applications. If your credit score is on the lower end, take a few steps to improve it right away.
To give you an idea, the majority of online lenders will want you to have at least a credit score of 550, including short-term lenders. The higher your score, the better. If you are at 700+, you will have a much greater chance with products like an SBA loan or with a traditional bank, which can offer the most affordable financial services.
Myth #3. You will not be able to get a small loan
No matter what the loan amount is, the underwriting costs remain the same for the lender. Because small business loans have less profit for the banks, they don’t consider the cost of underwriting them to be worth it, and so generally they aren’t overly interested.
But because of Small Business Administration, being approved for a loan is no longer a problem for business owners with low capital needs, so they don’t need a lot of money. With the Microloan program, the SBA offers loans for as low as $500 or as much as $50,000. Interest rates range from 8% to 13%.
Outside of the SBA’s Microloan program, most online lenders are willing to make smaller loans. For example, the Fundera marketplace’s average loan is $52,000, and that’s all loan products and all kinds of lenders.
Myth #4. Getting a small business loan is a lengthy process
If you’re seeking a loan through your local bank, there will be tons of paperwork, and you could even wait months before you get the funding. Thankfully, finding the financing needs not be a long process.
If you require money quickly, there are alternative lenders online, where you just fill out a loan application and receive funding in as little as a couple of days. Often you will pay higher fees for the convenience, but if you want to quickly grow your business, or you need money in a pinch, having to wait for funds is the last thing you want to do.
How fast you are able to get a loan depends a great deal on the type of loan you are applying for. Keep in mind, fast cash is expensive cash. A shorter-term product can be finalized quicker than a longer-term product. If you need money fast, and you’d like to know if you can qualify for a long-term loan, then make sure you have all your financial information ready for your appointment or when you sit down to fill out the application online.