We speak with thousands of business owners considering their finance options, and there’s some common misconceptions that crop up time and time again. With that in mind, we took a look at some of the myths surrounding small business loans to separate the fact from the fiction.
1. You need to have a perfect credit rating to get a loan
Many small businesses simply presume that if they have a bad credit history, or a limited one, then they won’t qualify for a small business loan.
While it’s fair to say that a good credit rating makes borrowing much easier, there are still options for those building their scores. For instance, loans with shorter terms are much more likely to be offered to those with a lower credit score. Or it may be that you’re still able to get the loan you want, but just on a higher interest rate.
2. Only businesses in trouble get loans
Some think of loans as a last resort when you’re in trouble, but really they’re a way to invest in your business. Like getting a mortgage to buy the house you want, a business loan can help you achieve the progress you wouldn’t be able to without funding.
There are many reasons to borrow as a small business, such as buying new stock and equipment, hiring new staff or just growing your business. Extra cash flow can also help to manage seasonal dips, or provide greater flexibility to make the best decisions for your business. Loans can also be used for things such as marketing and advertising, that will help to bring in more revenue.
3. Taking out a loan makes your business less secure
A concern some businesses have is that taking out a loan might make their business less secure. While it’s true that you’ll have monthly repayments to make, it’s important to remember that loan providers, like Funding Circle, will only lend what they believe your business can afford to repay.
On the upside, the extra investment can help with slow periods, allowing your business to become more resilient to changes in your business revenue. It can also allow you to grow your business and diversify your products and services, which again makes you more resilient if there was a decline in one area. By growing, you could also benefit from economies of scale, saving on your operating costs.
4. If your interest rates change, your repayments will increase
Interest rates are always a topic of conversation when it comes to small business loans. Some people worry that their interest rate may change during their loan and they’ll no longer be able to make the repayments. However, a fixed interest loan can help you avoid ballooning repayments. At Funding Circle all our small business loans are fixed-rate, so your interest rate will never suddenly spike if the Bank of England raises the base rate, meaning your repayments will stay the same throughout your loan.
5. You can only afford the repayments if you invest and grow your business
Another common misconception is that repayments will be based on your business’ projected growth, so if your new venture doesn’t work as well as you’d hoped, you wouldn’t be able to make the repayments. However, at Funding Circle, your loan is assessed based on your business’ current activity. That means you’ll only be offered what your business can currently afford.
6. Getting approved for a small business loan takes forever
In the old days, securing business financing required compiling endless records, heading to the bank and then waiting weeks, or even months, to see any return. Fortunately, this isn’t the case anymore. At Funding Circle, for example, completing an application takes just 10 minutes and decisions are made typically within 24 hours.
7. You should go to your bank first to get a small business loan
While banks used to be the place to go to secure a small business loan, the options available to businesses have increased dramatically in recent years. Other potential avenues include peer-to-peer lending or crowdfunding, so it’s definitely worth checking around to find the deal that works for your business.
For example, thanks to the tailored service we offer at Funding Circle, 9 out of 10 of our clients would come back to us first next time, instead of going to their bank. Be sure to explore your options to get the best possible result for your business.
Looking for affordable finance to kickstart your next business venture? Check your eligibility for a business loan with us in just 30 seconds.