If you’re currently working on setting up your start-up business, you’ve surely heard all sorts of myths related to Start-up Business Loans. Some warn you against banks, while others swear they’re the best option for financing. Others tell you that getting a loan will take forever, will require a perfect credit score, or won’t be possible at all.
All of these myths have been circulating for years and have been the source of misinformation for many entrepreneurs who were trying to finance their business venture as easily and as reliably as possible. Let’s debunk the most popular 6 myths about start-up business loans.
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There is a common misconception among entrepreneurs that start-up businesses are never accepted for loans from traditional financial institutions, such as banks. Supposedly, it’s too risky and the bank would be gambling on a business that has yet to be established and that cannot deliver. As you’ll be able to see, that’s a lie.
Truth: In fact, you may be surprised to find out that 16% of all financing for companies under two years old comes from banks. And it’s true that the number is not super impressive, but did you know that it’s actually higher than a lot of other alternatives that are often championed as ideal sources of financing for small businesses and start-ups? It’s higher than the percentage of financing provided by friends and family of the entrepreneur, venture capital, government agencies, business angel investors, and even trade creditors.
Banks won’t be the ideal funding option for all businesses, so to determine whether or not they’re right for your company, you have to look at the type of business you’re putting together and the growth you are likely to experience. Steady growth in a business like a coffee shop works great with a bank loan, but accelerated growth from an online business, for example, will require more capital and at a rapid pace, so you’re better off going with an alternative means of financing that suits your needs better.
A lot of people don’t even try to get a start-up business loan, because they get so discouraged by the supposedly high amount of money they’re going to need. Getting a business up and running is a massive undertaking, without a doubt, but the amount of money required is typically vastly overstated.
Truth: If you thought that you’d need fabulous amounts of money to start your own business, you’ll be happy to hear that’s only a myth – you can get your business going for as little as $25,000 and in fact, that’s how much it takes the average start-up to start running.
It’s more difficult to work with little money, there is no doubt about that. However, it’s entirely possible, as long as your business plan is solid and you employ some smart tactics along the way, such as renting and borrowing, instead of purchasing, for things like commercial space, vehicles, and equipment. Even hiring based on commission instead of salary can save a lot of money when it counts the most.
According to the myths that are going around, it’s not just banks who supposedly won’t hand out loans; none of the other financial institutions will, either. According to some, it’s incredibly difficult to the point of being almost impossible to get a loan as a start-up, because everyone is looking for an established business that’s been in the game for a few years already and has the stats to show for it. That includes business credit and other credentials that start-ups just lack completely. Surely that means that no one will trust a start-up with a loan, right?
Truth: Wrong! Yes, it’s easier when your business is already established, but numerous lenders are starting to offer to finance start-ups, and they don’t require a business credit history. Of course, the flipside of that is that your personal credit score does come into play in a big way. In fact, that’s going to be the main thing they look at and it’s going to factor into the decision-making process.
You also need to be aware of the fact that the rates you will be offered won’t be as good as some other businesses may benefit from, but the important part is that it is definitely possible to get financing. You just need to be prepared and have your documents in order. Proper preparation will ensure your success.
For years, companies with bad credit or no credit at all have stayed away from loans, thinking that no one will approve them for a loan because of their rating. And it used to be true – traditionally, banks would only fund businesses that were able to demonstrate fantastic credit, leaving start-ups in a hopeless lurch. However, the belief that things are still like that and that one’s credit score is the only and most important aspect that matters is completely (and thankfully) false.
Truth: Things are changing, and private and alternative lenders are broadening the spectrum of financing for start-ups and small businesses. Credit rating is no longer the only thing being considered when applying for a business loan, as documents such as cash flow statements and revenue history are coming into play and gaining equal importance to a credit score when it comes to approval criteria.
Credit still plays a role, and if possible, it should definitely be improved in order to boost your chances of eligibility. Your financial history doesn’t paint the whole picture of your company, but it does offer a snapshot, so you’d better do your best to make sure it’s a good one.
Some popular wisdom says that the more you ask for, the less you are likely to receive, which can really put a damper on your plans. Especially if you end up needing more than that $25,000 we mentioned, it can be a little daunting – what if you are killing your eligibility? Are you trying to bite off a bigger chunk than you can chew and ending up with nothing? It’s a terrifying prospect, for a business owner.
Truth: While smaller loans used to be more readily available in the past, that is no longer the case; lending offices aren’t as reluctant to approve larger loans anymore, because it turns out that they are more profitable for them, in the long run.
It is understandable why an entrepreneur would be apprehensive to borrow a large sum of money, but taking less money than you actually need makes no sense. Borrowing the amount you need, albeit a larger one, is more likely to work well for you and ensure profitability and growth, thus allowing you the opportunity to pay back your loan with ease. The only thing you need to ensure is that you can afford to make your loan repayments on time.
You know how the story goes – you can only trust what you can see and check, so if you don’t meet up with a stern man in a suit who can reject you in person, then the loan isn’t real. The online lender charges you way more than they should, adds hidden charges that aren’t included in the contract, and ends up scamming you, instead of helping you. But is that all true?
Truth: While there certainly are sketchy and predatory companies out there that offer online loans, that certainly doesn’t mean they are all the same. It would be bad business to reject a potential prospect for financing because of preconceived notions or unfounded claims. At the end of the day, you’ve got the same chances of getting scammed whether the company has a physical office you visit or not.
In reality, online lenders can actually offer great opportunities for you, because they are more likely to take on “risky” lenders with imperfect credit scores or a brand new start-up that is just getting off the ground. In addition, you need to thoroughly check and vet any lending institution you do business with, whether it’s online or not, so as long as you make sure the company is legitimate, there is absolutely no reason to avoid an online lender.
The business world is full of myths that can scare off entrepreneurs, especially when it comes to financing. It seems like all Start-up Business Loans come with warnings, caveats, and restrictions, but it’s actually not all that bad. A lot of these common misconceptions can be easily debunked, so whether it’s bank eligibility, loan amounts, or concerns over credit score, chances are that getting a start-up business loan is actually easier than you think.
Financing isn’t the only thing you have to deal with when starting a business online. Be sure to check out my How to Start a Small Business Online post for other important things to consider.
So, what assumptions have you been under when considering financing your start-up business? Do you have any experience with obtaining Startup Business Loans? What questions or concerns do you have regarding Start-up Business Loans? I’d love to hear what you have to say. Please let me know by commenting below.