9 Myths About Small Business Loans
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It takes money to operate and grow any business. Sometimes you don’t have the money you need, when you need it. That’s where small business loans come in. For many small business owners, the word “loan” has negative connotations. But do you know what accounts receivable financing can do for your business? What about other types of small business loans?

Last year the U.S. Small Business Administration (SBA) said small businesses should improve their financial capabilities. The SBA quoted an Intuit study that found “more than 40% of U.S. small businesses consider themselves financially illiterate. Yet 81% handle their business’ finances.” The SBA says, “it is inevitable that you will at some point have to deal with securing the capital to fund and/or expand your business venture.”

There are a lot of myths and misconceptions out there about business loans. Misinformation is dangerous. It can hinder your ability to grow your business and make a profit. Let’s uncover the truth behind nine of the most common myths.

Myth #1: Accounts receivable financing is for the desperate

Businesses borrow money for lots of reasons. You might want to:

  • Turn a new idea into a new product
  • Deal with an unexpected expense
  • Increase working capital
  • Smooth cash flow fluctuations
  • Finance inventory
  • Purchase new equipment
  • Purchase Real estate
  • Remodel or expand your store

These reasons do not say “desperate.” They say “growing small business.” Accounts receivable financing is sometimes called factoring. Or in the case of selling your future credit card receipts a merchant cash advance. It is especially valuable to improve cash flow. For example, your medical practice may have high-dollar receivables. But patients and insurance carriers are often slow to pay.

With accounts receivable financing or merchant cash advances, you can receive your money sooner. You can also predict when you’ll receive it. And there’s another benefit. By financing your receivables, you can get out of the collections business and focus on medicine. Or cutting hair. Or bidding more construction jobs. Many types of small businesses can benefit by balancing their cash flow.

For this reason, factoring receivables and selling your business’s future credit card receivables has become increasingly popular. And not only here in the United States. Worldwide, use of merchant cash advance financing grew 15% between 2013 and 2014.

At United Capital Source (UCS) we do not work with small business owners who are desperate. No lender does. If you have reached that point, your business isn’t a good financing risk.

So, all that being said, you may not need a business loan. But you may want one.

Myth #2: I can use my business loan for anything I want

No one will loan your business money for no apparent reason. Lenders want reassurance you can repay them. They feel reassured when they know how you will use the money. And how that will benefit your business. Being clear about your goals shows them you’ve thought things through – you have a good business case.

You may face penalties if you use your business loan for an undisclosed purpose. At the very least, honesty builds trust. Lenders will be most impressed if you’re up-front about your needs.

At UCS, we want to know your plans for two reasons. It’s the only way we can place you in the best financing program for you. Not every type of financing is the best choice for every financing need. Plus we want to build a long-term relationship. We want to continue helping you in the future, when your business needs new financing.

Myth #3: Online lending is scary – you don’t know who you’re dealing with

The alternative business financing industry has grown steadily since the Great Recession. Today, there are many online business lenders that are entirely legitimate. The issue isn’t whether you can look them in the eye. It’s about trust. If you’re considering alternative financing for your business, it’s important to do your due diligence. Look for a lender who has solid, successful experience working with businesses like yours. Ask about types of funding they offer, fees and repayment terms.

At UCS, online is how we do business, but it’s not who we are. There is nothing impersonal about us.

Our goal is to build long-term relationships with our small business customers. As your business grows and changes, your financing needs will change too. We assign a dedicated UCS account rep to you. That way you never have to start over. You won’t have to explain your business goals and operations details to someone new.

Myth #4: All lenders care about is your credit score

It’s true that most banks rely heavily on credit scores. But alternative financing lenders do not zero in on one factor. Each company has its own criteria, but they look at a wide variety of things. So don’t despair if your bank turned you down for a business loan. Accounts receivable financing or another alternatives may be better for you anyway. Even if your credit isn’t that great.

In the past five years, United Capital Source has matched more than 11,000 businesses with more than a half-billion dollars. Our two most popular programs? Merchant cash advances and bad credit business loans. A less-than-perfect credit score doesn’t necessarily mean you’re a bad risk. That being said, it’s always a good idea to improve your credit. That will open more doors for you later on.

Myth #5: Who needs a bank? You can get a loan from the SBA

This is a common misconception. The U.S. Small Business Administration does not loan money. The agency does guarantee certain kinds of business loans. It’s something like having a co-signer for a personal loan. If you fail to repay, the bank will not lose the principal they loaned you. For many businesses, this improves your chances of approval.

You can apply for SBA-backed loans through banks, credit unions, and many alternative lending sources. But there are myths about that, too. You may have heard that this process takes too long. That you’ll drown in paperwork. That was true in the past, but today the process is much simpler. The SBA has streamlined both their application and underwriting. You may also have heard the myth that only new businesses can get an SBA loan. That’s not true.

United Capital Source does not fund startups. But we do match some clients with SBA loans if that’s the most appropriate option. The SBA backs several different types of business loans. Some are designed to help with business expansion or financing expensive fixed assets such as real estate or equipment.

Myth #6: It’s smart to borrow as much as you can

Your business may qualify to borrow more than you need right now. But why would you saddle yourself with payments that are higher than necessary? You’re paying interest on the money you borrowed. That’s money you could be using for some other business purpose.

On the flip side, some business owners are afraid to ask for as much as they need. They worry it will be seen as “too much.” That might ruin their chances for approval. But lenders know that if you shortchange yourself, you can’t accomplish your goal.

So what’s smart is to be realistic. Borrow the right amount – as much as you need, but not more. With terms you can afford to repay. What if you don’t qualify for a single business loan that meets your needs? This is where working with the right alternative lender may make all the difference.

At UCS, we work with you to determine what that “right amount” is. Every business has a unique set of challenges and goals. We take the long view, because we aren’t looking for one-shot deals. We want to work with you long term and help your business grow.

Myth #7: Banks are the best place to get a business loan

Banks and credit unions used to be your only source for business loans. If they turned you down, you had nowhere else to turn. Today, that’s no longer the case. These institutions still loan money to businesses. But a traditional bank loan might not be your best financing choice. For one thing, banks rarely finance less than $250,000. What if you don’t need that much?

In our experience, most small business owners are looking for $25,000 or less. We help clients find funding for as little as $2000. We’ve also done deals as large as $2 million.

Alternative lenders offer a variety of merchant financing options. You can get funding in smaller amounts. You can get the money you need much faster, with much less paperwork. In 2014 the Harvard Business School published a report on small business lending. It noted that, “particularly during the economic recovery, there has been significant growth in innovative alternative sources of loan capital to small businesses.”

The report’s authors suggested two possible reasons for this growth. One, “businesses are forced to seek non-traditional credit because banks remain unwilling to lend.” Or, two, “non-traditional lenders have found ways of providing capital to small firms with greater efficiency and convenience.”

With the right advice you can find funding solutions that match your unique goals and circumstances. That’s the kind of flexibility small businesses need to succeed and thrive.

Myth #8: I don’t need a written plan, it’s all in my head

Preparation counts. You might have a clear idea what you want to accomplish and how you plan to do that. But lenders cannot read your mind. You’re asking them to take a chance on you. To believe in your business. They want to help, but they cannot do that on faith alone. Give them the information they need to support you.

For some types of small business loans, you must have a formal business plan. One example is SBA 8(a) loans. These are designed to help “socially or economically disadvantaged” companies. But some business owners in this category believe they don’t need a loan at all. They think they will automatically get government contracts. That’s another myth. You may get preference over other companies, but you still have to win the contract.

Know your goals and strategic needs. Business writer Claire Parker says you need a plan for your business loan as well as your business. That way, you can show prospective lenders “a detailed document that includes how you determined the amount you need, how the money will be used, and how that activity makes your business more sustainable.” They won’t have to read your mind.

At UCS, our goal is deep understanding of every client. We have to know your business history to place you in the right program for the future.

Myth #9: All alternative financing lenders are pretty much the same

Financiers don’t expect all businesses to fit a single mold. You shouldn’t expect all lenders to fit a mold, either. Each one is different. Financing companies tend to specialize in different types of funding. Many focus on specific industries.

For example, here at UCS, we work with a wide variety of small businesses. But we specialize in restaurants, medical and dental practices, construction firms, and contractors. We also work with hair salons, day spas, and auto body and repair shops.

Be cautious in choosing your lender. Look for a financier that is familiar with your type of business. Understanding how you operate ensures they can help you better. Look for a company that has an A rating with the Better Business Bureau. That shows they have a legitimate track record. And avoid companies that expect an up-front fee. They want to get paid whether they help you or not. They should get paid when they do help you.

The bottom line on small business loans?

Know that multiple options exist. Learn how different types of financing can benefit your business. And don’t assume you have to “take whatever you can get.” That way you won’t be confused or distracted by myths.

Today, small business owners see loans are financial management tools. Accounts receivable financing, merchant cash advances  and other types of funding can help your business stay strong and grow faster. With well-tailored advice you can likely find the perfect match.

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