With the rise of alternative lenders, lending standards have changed significantly from where they were even just a few years ago. Now, it's not only easier for small business owners to qualify for a business loan, it's easier for them to actually apply. So even though you might think you know all there is to know about small business loans, you might be surprised.
If your business might need financing--whether now or in the future--here are 4 myths you need to be weary of.
1. You Can't Get a Loan if You're Denied by a Traditional Bank
There was a point in time when your traditional brick and mortar banks were the only financing option available to businesses. So, it was true--unless you had a rich uncle who was willing to invest in your business--that a denied loan application meant you were out of options. But this is no longer the case.
After the financial crisis in 2008, big banks tightened up their lending standards, making it nearly impossible for small business owners to get the financing they needed. Luckily, that financial void was quickly filled with a new group of alternative lenders, who now give small business owners more financing options than ever before.
2. You Have to Have a Perfect Credit Score
This is still partially true--if you're applying for a traditional bank loan, your personal credit score will be weighted pretty heavily during their underwriting process. However, since the banks are no longer a small business owner's only option, a less-than-perfect credit score won't completely ruin your chances of getting the financing you need.
Although almost every lender still considers your credit score before approving or denying your loan application, they often have more lenient standards. Plus, some lenders even prefer real-time data to your credit score--they consider your business checking account, Amazon Sellers account, QuickBooks, and the like.
The credit score does, however, still remain one of the most important factors in most loan applications. If your credit score is on the lower end, you should take the steps necessary to improve it right away.
To give you an idea, most online lenders will want to see a credit score of 550 or above. This includes short-term lenders and others offering more expensive products. If you'd like to explore longer-term, lower-cost debt online, you'll need to have a score of at least 620. And of course, the higher your score the better. If you're at a 700+, you'll have an even better chance with products like an SBA loan or the bank, which are the most affordable products on the market.
3. You Won't Be Able to Get a Small Loan
The underwriting costs are the same to the lender, regardless of the loan amount. So because smaller loans mean less of a return, banks don't consider the costs to be worth it and, typically, aren't interested in smaller loan amounts.
But thanks to the Small Business Administration, getting a loan is no longer a problem for business owners who have low capital requirements and don't need a lot of money. With their Microloan program in particular, the SBA offers loans for as little as $500 to $50,000. Interest on these loans range from 8 to 13%.
Outside of the SBA's Microloan program, many, if not most, online lenders are willing to make loans with smaller amounts. For example, on the Fundera marketplace, the average loan size is $52,000, and that's across all types of lenders and loan products.
If you need a small amount of working capital to pursue a business opportunity, you have more options than ever.
4. It Takes a Long Time to Get a Small Business Loan
If you're seeking a loan through your local bank then, yes, you will have hefty amounts of paperwork to fill out, and you could wait for months before you receive funding. But getting the financing you need for your business does not have to be a long, drawn out process.
If you need money quickly, you can find an alternative lender online, fill out a loan application within minutes, and receive funding in as little as two days. Often times you pay for the convenience with higher fees, but if you're looking to grow your business quickly, or need money in a pinch, waiting for funding is the last thing you'll want to do.
How quickly you can get a loan depends on the type of loan you're evaluating. Fast cash is expensive cash, so for a shorter-term product, you can move quicker than with a longer-term product. If you need money fast, but want to see if you can qualify for a lower-cost, longer-term product, make sure you're coming to the table with your financials completely prepared.
Although some of these myths about small business loans were once true, alternative lenders have changed the lending game for small business owners as a whole. Now it's much easier for entrepreneurs to get the funding they need in faster times than ever before.