Some Common Myths around Business Loans

  • Business Loans
  • 4 Months ago
Myths about Business Loans
HIGHLIGHTS

  • You must have a perfect credit history
  • Getting a business loan will take months
  • You have to have a business to get a loan


A business loan is an unsecured form of credit offered by banks or non-banking financial companies (NBFCs) designed to cover various expenditures in a business. The borrowers of a business loan do not need to keep any asset as mortgage to avail the loan from the lenders.

Self-employed or non-professional individuals can apply for and obtain business loans if they fulfill the required eligibility criteria of the bank or the non-banking finance company.

With many common myths around business loans, the process looks complicated and time consuming, especially for those who are apply for a business loan for the first time. However, like several other types of financing options, processing of business loans differs from applicant to applicant. 

Here are a few common myths that you should not believe in if you are applying for a business loan:

You must have a perfect credit history

Many entrepreneurs believe that they must have a neat and clean credit history to qualify for a small business loan. Well, this is one of the biggest myths around business loans. No doubt that a good credit history certainly increases your chances of getting a business loan, but you do not need to have a squeaky-clean credit history to get the loan application noticed by lender banks or the NBFCs.

The credit score requirement of the applicant varies depending on the kind of loan. The short-term business loan process tends to be more generous, with many lenders targeting credit scores of 550 and above. Nonetheless, since the applicant’s credit history and credit score plays an important role when applying for a business loan, it is always a good idea to take steps to improve the credit score for securing the best business loan possible. 

Getting a business loan will take months

In the good old days, the only way to secure a business loan was to compile numerous records, head to the local lender, and wait for weeks or months to get it approved. However, things have changed drastically.

Now, a small business owner can complete the business loan application process online with many lenders simultaneously in less than an hour and the money gets deposited into the business account in just a couple of days. While a few banks might take a little extra time to process the application and approve the business loan, most banks including NBFCs see through the process pretty quickly. 

You have to have a business to get a loan

It is a common myth that you cannot get a business loan unless you have an existing business. You can get a business loan to start your business. Indeed, getting approval often becomes easier for the existing businesses, as they come with a longer financial track record and credit history. But, this does not indicate that the lenders do not approve business loans for brand new businesses.

Several lending companies are startup-friendly and offer business loans without much hassle. A business credit card can provide brand new businesses access to working capital. Multiple options are available, irrespective of the applicant’s business loan requirement. One must do the homework, know the business inside out, and shouldn’t be afraid to reach out to professionals for assistance. Following these will certainly take the business owner closer to getting his or her business loan application approval. 

Only large business loans get approved

Many small business owners incorrectly assume that business loans are only appropriate for the applicants who apply for a large sum of money. While the traditional banks tend to prefer large-ticket business loans, which are worth their investment and time, there are several non-banking finance companies and micro loan providers that focus on the small business owners who need business loans.

In the last one decade, several NBFCs and micro loan providing firms have emerged in India that provide small ticket business loans to the business owners who require more cash than what they have in their hand. However, if a small business owner doesn’t need a big-ticket business loan, there’s no point he or she should opt for one.

You must offer collateral to get a business loan

Collaterals can be a scary part of the borrowing procedure for many small business owners, as he or she is applying for a business loan because in the very first place there is a fund crunch. In that scenario, tying up some of the capital he or she has in a loan becomes very difficult for the business owner. Many business loans indeed require the applicant to offer collateral in exchange for the funding, but there are exceptions as well. Several small business loans can be availed without any collateral requirements. These include unsecured business loans, unsecured business lines of credit, merchant cash advances and business credit cards, etc.

None of these require a small business owner to put up collateral to get his or her business loan application approved. Instead of that, the lender may ask for a personal guarantee from the applicant. This means that the applicant will be personally responsible for paying back the business loan amount with the interest added. In case, the business owner misses payments or defaults on the loan, he or she has to cover the balance out of his or her own pockets. Depending on the business owner’s financial position and business status, this could be a worthy trade-off for the applicant. 

All business loans are the same

Getting a business loan is certainly not a cakewalk. But, it is not something like building a rocket either. Loans vary based on case-by-case. Several factors affect the approval of a loan and the amount of loan sanctioned, including business requirements, finances, credit history, plans for the funding, etc. For example, a business loan to purchase inventory will have different terms and conditions from a business loan to roll out a large-scale marketing campaign. Before the lender bank or the NBFC approves the loan application, they pay attention to assess the specific risk factors associated with the particular business of the applicant.