First-time small business owners are very much like first-time parents. They’ve put so many hours, so much blood, sweat, and tears, and so much of their hearts into this new creation that can’t fend for itself. It’s hard to step away from, and even harder to realize when you’re reacting out of emotions and acting on semi-true “facts” that explain how best to raise your “child.”
But it’s time you let go enough to do some research about loans for small businesses, and learned what’s true and what is just a common misconception. There are countless misconceptions and semi-truths about small business loans floating around out there.
Here are the 6 most frequently repeated misconceptions about loans for small business, so you can start making better-informed decisions for your “baby” based on the facts:
1.“If I Don’t Already Have a Formal Plan, I Can’t Apply for a Small Business Loan”
That’s not necessarily true. Have a formal, final-draft version of your small business plan will always help. But it’s not actually required.
Nobody expects you to have thought as far as 20 years down the road just yet. Not even the strictest small business loan lenders. They know that your main efforts are concentrated on the day-to-day stuff that keeps your young business afloat.
So there’s usually no need to present a formal plan to potential providers of loans for small businesses. It’s typically only deemed necessary when there isn’t enough data yet on your business for them to formulate an opinion about you.
That means that if you need the small business loan before you even open, they might want to look over your business plan because there’s no other evidence for them to base a decision of worthiness on. But your personal character might be enough to win the loan by itself.
If you’ve at least proven that you have a fighting chance in the business community, then there’s probably no need for you to draft up a special formal plan just for the sake of getting loans for small businesses.
Generally speaking, most traditional banks will want to see a formal plan. But with organizations like the SBA, it’s probably not necessary. It often just depends on the situation.
2. “The Small Business Association Gives Loans for Small Businesses Directly”
Nope. This is one of the most common misconceptions about loans for small businesses. The SBA doesn’t actually just hand you the money that you need like they’re dispensing gumballs from a machine. Instead, they can guarantee you a percentage of all loans from third party lenders.
They work with the providers of loans for small businesses that they know to be trustworthy and effective for new businesses. This provides you with a level of both credibility and safety.
The SBA will determine the application process and the requirements needed to qualify for a small business loan through them. This usually involves some kind of background check, your resume and business plan, your credit reports, bank statements, income tax returns, and business credit reports.
Provide them with whatever information you can about your small business. It’ll help you to provide a clearer picture to prospective providers of loans for small businesses, and show you in a favorable light that identifies you as being on top of your business’s records and data.
Even SBA-approved loans might require some form of collateral, as well. This could be personal or business collateral.
Loans through the SBA aren’t always from banks. Sometimes they’re through credit unions, nonprofits, microlenders, or from wherever is needed to get you your money. But because you’re working through the SBA, you’re more likely to receive a better loan that’s been thoroughly screened and vetted as high quality.
Basically, even though the SBA doesn’t lend you the money directly, it’s still always a good idea to go through them whenever possible. They’re designed to put the needs of small businesses first, and it shows when they help connect you with providers of loans for small businesses. They also provide financial counseling services, and other resources that will prove extremely helpful throughout a very delicate process.
If you can get their help, you should always consider accepting it; even though they aren’t directly your lender.
3. “A Small Business Can’t Get as Good Loan as a Larger Business”
That’s not true. Loans for small businesses simply work differently than other kinds of loans.
So yes; while a traditional bank would never bother with a small scale loan like the one you probably will need (typically less than $250,000) but when it comes to small businesses, exceptions are usually made.
That’s not to say that you’ll magically get a better deal on loans because people take pity on small businesses. It’s just that small businesses have different needs and loan capabilities than those of larger businesses or people seeking personal loans. (And no- you shouldn’t get a personal loan to help your business. Ever.)
While some banks may stay rigidly to that minimum loan amount, even for small businesses, many banks have programs specifically set aside for dealing with small businesses. Even then, a credit union, nonprofit, or some other alternative loan resource will be more flexible and just as good in terms of quality.
Because you’re a small business, funds can often be provided in a week or less without much fuss to it. While you still shouldn’t ask for too little loaned money (a sign that you’re on the brink of failure) nor too much (a sign that you’ll go straight into debt and stay there), most lenders recognize that small businesses have different needs, and will adjust their loans accordingly.
Avoiding major institutions when it comes to loans for small businesses will also be in your benefit. You’d be better off going with a lender that understands your area of business, and is experienced in providing loans for small businesses like the kind that you need. Don’t bother springing for a one-size-fits-all loan, because it won’t fit you properly.
Small businesses function differently, so they need different kinds of loans. Not better or worse; just different. And if it seems like a lender doesn’t grasp that and isn’t willing to work within those contexts, then it’s time to find a lender that does!
4. “You Need Perfect Credit to Qualify for Loans for Small Businesses”
It’s true that most providers of loans for small businesses, including the SBA, will want records of your personal and business credit histories. But that doesn’t mean that credit scores will determine the fate of your loan.
For personal loans, your financial history and credit score is one of the only pieces of data that can represent you and your worthiness of receiving a loan. But with small businesses, there’s usually more information available to reference in the loan process.
You have all the documents we mentioned earlier that can help providers of loans for small businesses to get a better idea of how your businesses is progressing. Sales reports, assets, and so on will be more indicative of the future success of your business than a credit score will be.
That’s especially true of young businesses that haven’t had time to build up much of a credit history yet. The lender may lean more heavily on your personal credit score then, but it’s more likely that they’ll simply examine the other evidence of your business successes or failures from additional business reports.
If you don’t have detailed business reports to provide potential lenders, then you need to rethink this whole thing. You’ll look like you don’t know what you’re doing, and it’ll seem like you’re blindly forging ahead with your business if you don’t have the proper records to prove that you’re taking steps… in any direction, really.
Your credit score will be checked. Hopefully it’s decent. But if it’s not, then it’s not the end of the loan process. You just need to turn their focus to the positive progress that your business is making, and back it up with the reports to prove it.
Paperwork and how you present yourself will be more important than your personal credit score, and often even your business credit. That being said: if your credit scores are truly awful, then you’ll likely have to pursue a less straightforward route.
If your credit score is really low, then you should ask for some financial counseling to help figure out where to apply for a loan, and how to present yourself positively to potential lenders. The extra prep work is better than getting rejected for a loan and having it sink your credit score even further into the mire.
5. “There’s Only One Type of Small Business Loan That’s Legitimate”
There are a number of types of small business loans, each doing a slightly different thing and benefitting a different kind of business. Choosing the right one will be a bigger challenge than finding you don’t have enough to choose from!
Through the SBA alone, there are many kinds of loans for small businesses, including…
Disaster loan: After some kind of disaster has occurred and caused considerable damage to your business, the SBA can help you with a disaster loan to repair and/or replace real estate, personal property, inventory, equipment, and help cover the loss of sales in the aftermath.
7(a) loan: This is the most popular loan program that the SBA offers. You can receive up to $5 million for a wide range of needs; including debt refinancing, rent/real estate, inventory, equipment costs, maintenance, exporting, and construction. 7(a) loans for small businesses cover pretty much everything you’d need.
504/CDC loan: 504 loans, or Certified Development Company, lets you borrow as much as $5.5 million, but only for the use of real estate or equipment. It’s a larger-scale loan, but it’s uses are more limited to specific needs.
Microloan: To cover startup, renovations, or expansion costs, small business owners can receive up to $50,000 with an SBA microloan. It’s a smaller-scale loan, but it’s perfect for covering quick needs like inventory, furniture, equipment, and the things that you’ll need to get started and running.
There are countless different kinds of loans for small businesses, and they’ll all work just as well as any other. But they serve different functions. That’s a benefit for small business owners, because you need a loan to serve a specific function. A large-scale blanket loan will only serve to drive you into debt.
Do some shopping around, and figure out what you qualify for, as well as which small business loan is right for your immediate needs.
6. “I Can Get a Grant as a Small Business, Rather than a Loan”
Sorry to tell you, but you’re probably not going to get a grant. Although the SBA does offer some grants to nonprofits and charities, a small business isn’t going to get one.
You might qualify for a federal grant, though. Federal, state, and local organizations may be able to help you; even if only a little bit. Check grants.gov to search for what you might be eligible for. It’s not the same as a small business loan, but a little extra money to get you going never hurts, and it certainly never hurts to look into it… just in case.
Unless you’re a nonprofit or provide some kind of charitable service, then you’re not going to qualify for general grant money. Even the federal, state, and local grants given out to small businesses are hard to get due to high demand. Those grants are designed to help small businesses thrive throughout America so that the economy is kept in balance and so the large-scale corporations that are so popular in the U.S. don’t completely monopolize the markets in every American town.
The fact is: you’re a business. Just because you’re a small, new business doesn’t mean that people should just hand you money because you’re struggling.
Loans for small businesses will always be your best bet, and a more lasting solution. But there are resources that can help you find what you’re looking for.