Small businesses rely on loans for a wide variety of purposes. From refurbishing premises to buying out another business, these financing solutions allow small to medium-sized enterprises to grow without impacting working capital or cash flow.
However, in helping SMEs secure critical funding we regularly come across some common fallacies about loans for small businesses.
So we decided it was time to nail these small business loan myths and separate truth from misconception.
Myth #1: Banks are best for small business loans
At one time, your bank may have been the first port of call if you needed a business loan, but financing options have expanded significantly in recent years.
Now, many lenders specialise in small business loans tailored to meet the funding requirements of all types of businesses.
Just as well at a time when small companies in the UK are struggling to find affordable bank loans.
According to the Federation of Small Businesses (FSB), high street banks are now turning down an increasing number of loan applications by small businesses. And those who do get a loan find it comes with high interest rates.
Banks are also known to be reluctant to approve certain types of business loans, such as financing to acquire another business and partner buy-in and buy-out funding.
Myth #2: You need a perfect credit score to get a loan
Your credit rating reflects the level of risk in lending your business money, and many small businesses presume they won’t get a loan if they have bad credit.
However, a low credit score doesn’t necessarily rule out a small business loan.
While a good business/personal credit history makes it easier to get an unsecured loan, a secured loan can provide an option in cases of poor credit. (Interest rates will likely be higher, though).
And bad credit can be improved by paying off old debt and managing new debt responsibly, making you eligible for an unsecured loan in the future.
Myth #3: Applying for a business loan always affects your credit rating
Lenders run a credit search with credit reference agencies when a business applies for a loan.
Too many hard credit checks over a short time can lower your credit score. However, many lenders carry out soft credit searches – pre-eligibility checks – that leave no trace on your credit report so won’t affect your credit rating.
Myth #4: New businesses can never get a loan
New businesses don’t yet have a credit score, and this can make it difficult to get a loan. But it’s by no means impossible.
One solution is to offer a personal guarantee, but bear in mind your home and/or other private assets will be at risk should you default on repayments.
Alternatively, some lenders are comfortable in helping start-ups accelerate growth, although interest rates may be higher.
Myth #5: If a business gets a loan, it’s in trouble
The vast majority of small businesses that apply for a loan do so to invest in their future rather than as a last resort in difficult times.
If anything, a business loan underscores a business’s potential for growth.
The immediate cash injection a loan provides can play a key role in helping a business achieve its goals in a timely manner, instead of having to wait while it accumulates the necessary cash.
Myth #6: Loan repayments undermine business stability
Some businesses may worry that a loan means a millstone round their neck in terms of repayments.
And they build long-term relationships with clients, providing impartial financial advice based on years of experience.
Myth #7: Rising interest rates are bound to push up loan repayments
It’s true that if you get a loan with a variable interest rate, your repayments are likely to go up if the Bank of England raises the basic rate due to shifting market conditions.
Not so if your take out a loan with a fixed interest rate.
With fixed-rate financing, repayments stay the same throughout the loan and you’ll know exactly what your payment schedule will look like and cost.
Myth #8: Getting a small business loan takes forever
In the past, applying for business funding involved a mountain of paperwork and waiting weeks or even months to find out whether you’d get your money.
This isn’t the case anymore. Checking your eligibility for funding through V4B Business Finance, for example, can be done online in a matter of minutes. And you could see the cash in your bank within 24 hours.
Myth #9: Small businesses can only get small loans
Another common misconception in the world of business financing is that small companies can only borrow small amounts – if you ask for too much, you’ll be seen as irresponsible or plain greedy.
Nothing could be further from the truth, and some lenders specialise in large loans for small businesses – larger loans mean they get more money back over time.
You can apply for a business loan of any amount provided you can prove you’re capable of meeting repayments obligations.
V4B Business Finance, for example, sources loans from £10,000 to £1,000,000-plus.
Benefits of small business loans
As credit brokers for business loans, we work with a broad spectrum of SMEs and are all too aware of the misconceptions that surround business financing.
As long as these mistaken beliefs persist, some business owners may be disinclined to apply for a loan.
That would be extremely unfortunate. As you separate myth from reality, it becomes clear that loans give small businesses many benefits.
Financing enables business growth and competitiveness while safeguarding cash flow and working capital.
It allows businesses to realise their potential and seize opportunities by going ahead with major investments sooner rather than later.
And securing a funding deal through a credit broker saves a lot of time and effort in finding the right lender. It also overcomes the problems associated with getting a bank loan.
Reach out to us if you’d like to know the truth about small business loans.