Business credit

3 small business loan myths

Updated: August 3rd, 2023

3 small business loan myths

The small-business lending landscape has changed dramatically in recent years. The days when you dressed in your Sunday best and nervously waited at the bank armed with 10 pounds of financial statements and profit projections are coming to a close.

Over the past decade, banks have largely pulled out of small-business lending (particularly for smaller loans, of $25,000 to $500,000) due to tighter regulations, high origination costs and archaic credit models that make it difficult to underwrite small business loans profitably. This has left millions of small business owners without access to the financing they need to grow, hire employees and invest in their futures.

To fill this funding gap, a new breed of online, nonbank lenders has emerged using innovative technology, alternative data and fresh credit models to offer fast and fair financing to small businesses looking for capital. As the small-business financing industry evolves, don’t be fooled by the new myths about small business lending:

Myth #1: Only those with a flawless credit history can score a loan.

Lenders will always look at your credit history as an important gauge of your financial stability. But it certainly isn’t the only indicator of a healthy business. Although old-line lenders’ clunky underwriting technology may not have the gusto to look past an average FICO score, new lenders are using big data and technology in a more holistic approach to understanding a business’ creditworthiness. For example, some lenders (such as my company, Funding Circle) consider a range of traditional and alternative data — from real-time cash flow to Yelp reviews — to predict how likely an owner is to repay a loan.

While a credit score may not pull as much weight as it did in the past, keeping in good standing is important. If the credit score is low (in the 600s or below), take steps to improve it. Be prepared to discuss your company’s experience with credit and clarify any late payments in the record.

Myth #2: The fate of a loan application lies in the hands of a faceless algorithm.

Technology is spearheading the disruption of the finance industry, but that doesn’t mean computers and their complex algorithms have the final say. Big data and credit models provide valuable insight into a borrower’s ability to make payments, but only the human touch can truly come close to assessing a borrower’s willingness to. Models and algorithms, sophisticated as they may be, simply can’t judge character as well as humans can. As a result, many new lenders are combining a robust list of data points with the right balance of human and algorithmic interaction when it comes to underwriting loans.

Look for a lender that has real people available to discuss your ambitions and loan options. Be ready to present your loan request in a way that shows you’re passionate about a market opportunity and can show how you’re going to repay your loan.

Myth #3: Expect to wait months for a term loan.

Banks typically offer the best interest rates compared with other financing options. But for small businesses looking to borrow a smaller sum quickly, applying for a bank loan may be more trouble than it’s worth. And banks frequently won’t lend to businesses that require a loan less than $1 million, and their long and cumbersome application process can take as long as four months.

Businesses can now apply for a loan in as little as 10 minutes and, if approved, receive funds in their account in less than two weeks. Historically, businesses looking for fast cash have been forced to turn to payday loans or merchant cash advances where speed comes with a hefty price tag and shady lending terms. Thankfully, some emerging players are tackling this problem head on. Coupling Silicon Valley technology with Wall Street financial acumen, some new lenders have created loan applications that are fast and simple.

Research and carefully review all options before signing on the dotted line. Some new alternative lenders may offer fast, easy cash but have opaque and confusing terms. Tools such as Nav’s annual-percentage-rate calculators can provide clarity on loan terms and the true costs of borrowing.

By: Sam Hodges, Co-Founder

Copyright 2014 by Entrepreneur Media, Inc. All rights reserved.


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