6 Small Business Loan Fallacies That You Should Know
As small businesses strive to make it big or expand their business, they always need to get loans as a means of funding their activities. It could be problematic for some and very easy for others. If you don’t understand these small business loan fallacies, you are bound to have issues.
There are so many myths surrounding business loans and you will need to be prepared or you will fail. We are not saying that it is impossible for loan outlets to let you down, this is far from the truth.
Related: 10 major reasons small businesses fail in Nigeria
What we are saying is that certain beliefs people have concerning business loans are very fallacious and doesn’t apply to the reality if you can exploit your options wisely.
We have taken time to analyze what experts that spoke to business news daily on this issue think about small business loans fallacies.
Small Business Loan Fallacies That You Should Know
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Obtaining a small business loan is the hardest thing you’ll ever have to do
Proper preparation will always prevent poor performance. If you prepare well for small business loans, then, you will have a relative success in getting one. The people that fall guilty of small business loan fallacies are the people who are less prepared for it.
Related: The legal requirement for starting a small business in Nigeria
Resultantly, they make up stories on how difficult it is to obtain this loan. People are always at the risk of believing this lie.
According to Michael Adam, founder, and CEO of Bankmybiz, “A lot of the frustration around obtaining small business financing can be eased by doing your due diligence, Be prepared, and have all your documents ready to present to lenders.”
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Perfect credit is a compulsory requirement to get a small business loan
The truth remains that low credit is usually an issue for some lenders. It is however not applicable for all lenders. You will see people who will be more flexible with their terms. This is why this is one of the small business loan fallacies.
“While traditional banks may be restrictive when it comes to obtaining credit, there are alternative options,” said Michael Kevitch, president and founder of Small Business Funding.
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Obtaining a loan through the bank is the best way to get a loan
The bank stands as the most sophisticated means of getting a loan but it is definitely not the best. Thinking that it is the best is one of the small business loan fallacies believed by some entrepreneurs. There are alternatives.
You could consider getting from private lenders or other institutions that are not necessarily the bank and you will still have better terms of repayment.
According to Kevitch, “Banks are more suitable for businesses that are interested in borrowing a large amount of cash and repaying the loan over a long period of time at a relatively low-interest rate.”
He went further to say that “alternative lending sources often provide faster approvals for shorter loan repayment periods; sometimes, businesses can obtain access to the funds in as little as seven days, he said. Because the terms are more flexible, interest rates are often higher.”
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The worst way to get a loan for your business is through a bank
Because the best way gets small business loans is not necessary through the banks, it will be very wrong to assume that it is the worst way. There is a school of thought in the business world who do that.
The banks are great options but there are specifications that you will need to fit in before they can provide exactly what you need.
“If you anticipate steady growth over the next few years, then a traditional bank may be best,” Adam said. “If you are growing like crazy and you know you will need to keep increasing your loan size by large increments each quarter, then entertain a nonbank lending partner, as banks may not be able to keep up with your needs.”
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The more money you ask for, the less likely you are to be approved for a small business loan
Some people believe that the approval they get for their loan requests is because they asked for little. This is not true and it is one of the small business loan fallacies.
I’m not saying you should borrow all the money they have. This is wrong. We are just saying that you should not be discouraged because you think they will not give you the amount you need. They are prepared for such eventualities.
The requested principal amount of the loan should not have an adverse impact on whether or not you’re approved. Lending institutions are generally prepared to fulfill large financing requests for the right borrower; it’s more lucrative for them in the long run anyway. Don’t be afraid to ask for the amount of money that you really need!
According to Jess Harris, content and social manager of business lender Kabbage, a working paper from Harvard Business School revealed that banks prefer lending larger amounts because they make more profit from large loans in the long run. In turn, banks are cutting back on smaller loans.
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The interest rate is the most important factor to watch out for
Thinking that the interest rate is the single most important factor to watch out for is misleading. The interest rate is quite important of course but it is part of the general package. It tells you how you are going to lose at the end of the repayment period.
Although interest rates are an important aspect to consider when choosing a lender, there are many other factors to keep in mind. Harris suggested asking what the terms of the loan are, how soon you need to repay the money, and what you can use the loan for.
