The 3 Biggest Myths About Small Business Financing

By Ty Kiisel

Financing a small business is hard enough without all the folklore that surrounds it. The world has changed a lot over the last few years, and how business owners accessed capital as little as 10 years ago doesn’t really apply anymore. You could even say it’s become part of the folklore.

As a result, there are things about small business financing that business owners need to learn — and unlearn — to make finding a small business loan easier and less time-consuming. Here are three of the biggest myths:

Myth #1: I need to see my banker.

It makes sense, right? The bank is where you have your checking account, your savings account, and maybe even your credit card merchant account.

If you have a credit score of 680 or better, a few years under your belt, some collateral, and are looking for a long-term (five- to 10-year) loan, the bank might be exactly where you need to go first. Unfortunately, most small business owners get turned away, and the myth of a bank loan isn’t likely to become a reality — and might not even be the best option.

Bankers typically focus on a small business owner’s personal credit score to determine if he or she is a good credit risk. And, if your personal credit score is below 680, the odds are not in your favor. What’s more, there’s nothing quick about a small business loan from the bank. If you need money for a short-term need like purchasing inventory, a long-term loan might not make sense because it would be too expensive. For example, nobody would purchase a car with a 30-year mortgage — regardless of how ridiculously low the monthly payment might be.

There are other ways to evaluate the credit worthiness of a business. Looking at multiple data points like your business’s cash flow to determine the health of your business is just one of many data points that can be used to measure a company’s ability to repay a loan. In other words, a small business owner who has been in business for a year or more and has an otherwise healthy business with regular income can likely get a small business loan even with a less-than-perfect credit score — it just might not be at the bank.

Myth #2: Non-bank lenders are for people who can’t get a loan from the bank.

While it is true that many borrowers who get turned down at the bank are able to find business loans with non-bank lenders, there are other reasons many small business owners look to the bank for alternatives first.

It’s not uncommon for the loan approval process at the bank to take weeks — sometimes even longer. Small business owners who need cash quickly often turn to non-bank lenders because they can have access to funds in as little as 24 hours.

Additionally, the flexibility of short-term financing solutions allows business owners to take advantage of special offers by suppliers or meet unexpected cash flow challenges without the burden of servicing a five-year or 10-year loan. Many business owners feel the convenience of shorter-term financing gives them more control over their finances and often even reduces the overall cost of borrowing when filling short-term financial needs.

Myth #3: I’ll just go to the SBA -- they’ll give me a loan.

The SBA (Small Business Administration) does not make loans. They do offer loan guarantees to participating banks and other traditional small business lenders. An SBA-guaranteed loan will likely require a personal credit score of 650 or better, and if you’re looking for financing to fill a short-term cash flow gap or otherwise need capital right away, you should know the SBA loan underwriting process takes some time — although they are making strides in that regard.

Like a traditional bank loan, an SBA loan will probably have a lower interest rate than a non-bank loan and may be a great option for creditworthy startups and other businesses looking for money to finance capital improvements or purchase equipment that can be depreciated over several years.

Know Your Financing Facts

If you can articulate why you want to borrow, it will help determine whether or not you need a short-term loan for something like purchasing inventory or a longer-term loan to buy equipment or expand your place of business. It will also help you decide how much interest you can afford over time and help you evaluate the ROI of the capital you’re looking for.

Although small business lending has changed for many business owners, it’s still possible to get a small business loan. You will need to understand your options and do a little bit of homework before you start looking, but for many small business owners, the changes are giving business owners better access to capital.