Dispelling Common Myths About Small Business Lending

Myth #1 Debt is Bad - I Should Grow Organically Instead

Growing your business organically in the first year or two is necessary, but at a certain point, it creates a bottleneck. Put simply, growth is expensive - it requires significant investment, and when your business is ready to grow after the first year or two, you may not have enough in your cash reserves to set yourself up for growth, despite strong sales.

Growing your business may require:

1. Hiring additional employees.
2. Increasing your inventory.
3. Opening an additional location or moving to a bigger space.
4. Enhancing your business website.
5. Launching new sales and marketing campaigns.
6. Purchasing new software to automate tasks or make your workflow easier.

Debt is not a bad thing, as long as the repayment plan is manageable. After all, most of us need debt in our personal lives – a mortgage, a loan for an automobile, etc. If your sales and revenue are strong and your business growth plan has a strong chance of increasing your revenue, then obtaining debt should be manageable and necessary.

Myth #2 The Interest Rate Advertised is the Interest Rate I’ll Get

There are ads from small business lenders that sometimes display a range of interest rates that reflect what the best-qualified applicants may get. When you apply for a term loan, for example, it’s important to remember that the rate you’re ultimately offered will depend on a several factors, including:

• Your personal FICO and business credit scores.

• Time in business. Lenders prefer long-established businesses. If your business is less than two years old, this may affect the interest rate you’re offered.

• Current economic conditions. The higher the federal funds overnight rate, the higher the interest rate on your loan will be.

• Your business’ annual revenue and debt-to-income ratio.

• Loan and term amount. Lenders see higher risk on long-term loans, and this may affect the rate you are offered.

• The industry your business is in. If your business is in a high-risk industry, for example, if your business is an independent restaurant, this may affect the rate on your loan.

Myth #3 Legitimate Lenders Provide Loans for “Startups”

Many aspiring small business owners mistake business lenders for the hosts of the popular show “Shark Tank.” This simply isn’t true. Many traditional lenders, including SBA lenders, do not lend money for most startup businesses (a business less than a year old or still in conception), although the word “startup” is commonly thrown around. The SBA uses the word “startup” in some of its pages, but in those cases, it refers to businesses that already exist but are in their early stages of operation. Many lenders, including SBA lenders, do not offer lending services to businesses still in their conception stages.

In some rare cases, there are lenders willing to provide startup lending to independent dentists and doctors, but that’s because those are fields in which the success rate is extremely high.

Myth #4 Obtaining an SBA Loan is Easy

One of the first types of loans small business owners think of is an SBA loan, especially a 7(a) loan. However, many business owners don’t know 7(a) loans typically require high credit scores and heavy amounts of application paperwork . While SBA loans generally charge a lower interest rate than other types of financing because they are partially guaranteed by the SBA, they usually require higher FICO and business credit scores and the applications usually require more paperwork, including a detailed business plan. Additionally, SBA loans may have longer funding times than other types of loans.

To save time, small business owners may want to first consider a term loan or business line of credit from a traditional bank or online lender. These financing products – especially from online lenders – often have lesser requirements, such as fewer years in business and lower credit scores, and less paperwork requirements. These financing products, however, often charge higher interest rates.

Myth #5 Revenue-Based Financing is a Scam

Many small business owners see revenue-based financing (RBF), as a scam lending product and the equivalent of a “payday loan” rather than a legitimate financing tool. Many financing experts preach the dangers of RBF, saying that it balloons into unmanageable debt.

• The truth is that any form of debt can become unmanageable when a small business falls on hard times due to market conditions. With RBF, however, there are many small business owners out there who praise RBF as a targeted financing tool that has legitimately helped their businesses, mostly because of the flexibility in its repayment terms.

While revenue-based financing is generally more expensive than other lending products in terms of cost of capital, it also may provide much needed funding with a repayment based on estimated future receivables plus a factor fee, often on a monthly basis.

Myth #6 I Need Excellent Credit to Get a Business Loan

There are many financing products from different types of lenders that do not require excellent credit for financing. For instance, while an SBA 7(a) loan generally does require excellent credit, a term loan from an online lender may require a minimum FICO score of just 650, while some traditional banks require a minimum of 680.

Additionally, there are online lending products, such as RBF, that may require an even lower minimum credit score so long as the borrower has a strong revenue history. Small business owners should take the time to examine all of the different types of financing products and their requirements to determine what their borrowing needs are.

Myth #7 All Business Lending is the Same

Small business owners seeking their first loan often automatically believe that they should just look at an SBA 7(a) loan or term loans. The truth is that thinking can be extremely damaging. They should first look at their capital needs and realize that there are different types of lending products that fulfill different needs. If they are looking for funding to purchase expensive equipment, for example, then equipment financing may be a more appropriate solution than a term loan. If they need to buy several relatively low-cost business items at different times, then a business line of credit may be the best choice for them.

Small business owners should consider the different types of financing products before making a decision:

1. SBA 7(a) and term loans: Typically charges lower interest rates than other types of financing but requires a rigid monthly repayment schedule. 7(a) loans also can take more than a week to fund.

2. Business line of credit: Charges a slightly higher interest rate but only charges interest on the money drawn from the credit line. A line of credit also provides flexibility – the small business owner can use it to meet several different business needs over time.

3. Equipment financing/leasing: Equipment financing suitability varies, but these are often good tools to quickly purchase or lease expensive equipment.

4. Revenue-based financing. May be a good tool to get funding quickly for small business owners who may have a strong sales history but do not have excellent credit scores.

Dispel the Myths

Believing the myths about credit scores, interest rates, and “startup” funding can be destructive to your business journey. Go into the process by realizing that there is no “one-size-fits-all" financing solution - the right financing depends on your specific goals, whether you're scaling operations, purchasing equipment, or managing cash flow. By staying informed and evaluating lenders based on your unique business needs, you can turn financing into a strategic tool for long-term growth. Dispelling the myths about the small business lending is the first step toward securing the capital you need to thrive.