Many business owners believe the lie that you have to have the highest credit scores, strong revenue and an established business with six-figure revenue or more to qualify for a business loan. However, small business owners need to understand that this is one of many myths about business loans. There are many business loan options available to them — they just need to find the right lender willing to work with their business. Explore the myths that you may be believing about business loans and learn the truths that debunk these lies so that business owners can feel empowered to get the loan they need to grow.
Myth 1: You need perfect credit to get a business loan.
Truth: It’s true that lenders like working with strong-credit borrowers and are more likely to fully approve their funding. But many lenders will accept less-than-perfect credit, especially if you show strong finances otherwise. You will need to find lenders willing to work with your credit level.
For example, traditional banks and credit unions are likely to want to see strong credit, while online lenders often advertise that they accept fair or bad credit, such as a 550 personal credit score. Some traditional banks may also offer credit-building loans to small businesses with subprime credit and low revenue.
Be aware that lenders accepting lower credit scores may offset the risk of lending by raising interest rates above what they’d offer a strong credit borrower. If you have some time before you need the funding, you could work on boosting your business’s credit. You can open trade credit with your suppliers and work to make all payments on time to improve your credit score.
Myth 2: Only large businesses qualify.
Truth: Small businesses can qualify for a business loan, even with $100,000 or less in annual revenue. You can verify the minimum requirements that your business must meet by looking at the lender’s website or talking with their customer service. Many online lenders accept annual revenue of $100,000, some even lower, while banks and credit unions typically like to see $150,000 to $250,000. These requirements accommodate small businesses.
If you have less revenue but can secure a loan with unpaid invoices or future sales, you might qualify for alternative types of financing like invoice financing. As long as you can show steady, established revenue, you can usually find one or more lenders that will work with you.
Myth 3: Banks are the best place to get a business loan.
Truth: Banks offer the convenience of fulfilling your banking and lending needs all in one place, but they’re not the only option on the market. Banks tend to tighten lending criteria, primarily working with borrowers that have strong credit and revenue.
To fill the gap in accessing credit for less-than-perfect borrowers, online lenders step up using technology to help them determine which borrowers pose less risk, despite lower credit and revenue. Online lenders also provide a streamlined application and approval process. Plus, they usually offer funding within 24 to 48 hours, a pace that traditional banks can’t match.
If you like in-person support, you can also look into Certified Depository Financial Institutions (CDFIs), which are banks designed to work with disadvantaged businesses. If you’re a minority business owner, you can also look for Minority Depository Institutions (MDIs), which are owned by minority individuals and slated to work with a portfolio of minority businesses.
Myth 4: You need collateral to apply for a business loan.
Truth: Lenders offer both secured and unsecured loans that don’t require collateral to back them. You simply need to show the lender that you can repay the unsecured loan with strong finances.
However, borrowers with less-than-ideal qualifications can get invoice financing if you secure the loan with unpaid invoices or a merchant cash advance if you secure the loan with future debit and credit card sales. Equipment loans and commercial real estate also secure the loan with the property being purchased, so you don’t need additional collateral for these types of loans.
You’ll want to consider all your options to find the right type of business loan and decide whether a secured or unsecured business loan is the best option for you. Secured loans do have the benefit of offering lower interest rates than unsecured loans.
Myth 5: Startups can’t get a business loan
Truth: Businesses at all stages of growth can find business loans. While banks may require businesses to have two years in business, online lenders often accept businesses with six months in business. Banks may also be willing to work with you if you already have an established relationship with them, such as having a business checking account, business credit card or business line of credit.
Myth 6: Business loans can take a long time to get funding.
Truth: Business loans usually take within a few days to a week to get funding. Online lenders such as Pinnacle often advertise approving loans within minutes and providing funding in 24 to 48 hours, some of the fasting funding timelines available. However, you might wait longer if you’re applying for an SBA loan because the lender and SBA need to approve the loan. SBA loans can take 30 to 90 days to process, but you can expedite approvals by working with an SBA Preferred Lender.
Myth 7: You’re limited in how you can use a business loan.
Truth: Many types of business loans allow you to use the loan for nearly any purpose, including business lines of credit, SBA 7(a) loans, SBA Express or microloans, business credit cards, invoice financing and merchant cash advances. When applying for a term loan, you usually need to state the purpose of the funding, but lenders may allow flexibility in what you use the loan for. Only equipment loans and commercial real estate loans are limited to purchasing the property you intend to buy with the loan. With any business loan, you will need to use the loan for business purchases.