6 Myths about Business Loans – Busted!
There is no doubt about the fact that businesses need funds to survive. As a business owner, you have to put capital to either start a new venture or keep the operations of an existing business running.
You can choose from many of the business loan options several lenders provide as per your requirements and preference. By availing a loan, you can quickly meet all your business requirements without giving away your control in the firm, as in the case of opting for investors. Also, you can get loans at lower interest rates and even avail of tax deductions.
But many suggest against taking debt to run or launch a business. This has discouraged several businesses, particularly small and medium ones, from applying for loans. Here is a list of some misconceptions about business loans that should be eliminated.
What Are the Popular Myths About Business Loans?
There have been many wrong notions and a need for more awareness about business loans that keep small businesses away from applying for credit. If you are planning to launch a new business and have doubts about whether you should be using business loans, then check these top misconceptions that you need to avoid.
- You Cannot Qualify for a Larger Loan Amount.
Many believe that banks and other lending institutions do not approve substantial loan quantum to small businesses or those that have been newly launched. But that’s not the case.
There are ways in which small or new businesses can secure large quantum loans. How? You need to provide a proper business plan to the lender to ensure that your business can grow and generate profit and decent cash flow so that you can repay the loan amount conveniently. Moreover, you will also need to show how you want to utilize the loan.
Now, if you can provide collateral or already have a high credit score, that can also help you secure a large loan.
- Pledging Collateral is Compulsory.
You might hear from some that it is mandatory to mortgage a personal asset as security to get a business loan. That’s not entirely true. Security is helpful in getting cheaper loans. Many lenders also offer collateral-free business loans. If you choose this loan type, your lender will not ask you to pledge any valuable asset. However, before applying for a collateral-free loan, ensure you know the terms and conditions and features.
- Loan Applications are Tiresome and Complicated.
Any loan application will indeed have some formalities and paperwork involved. But things have greatly improved with the rapid use of technology and digitisation.
You can now apply for a business loan online from the comfort of your home. Most of the lenders today have introduced an online loan application process.
So, you can apply for a business loan from your smart device, upload the necessary documents online and have the application approved seamlessly.
You must visit the lender’s website/mobile Appto check the eligibility criteria, interest rates and documents. After that, you can apply online. If the application form and the supporting documents are proper, the credit will be approved within a few days.
- A Credit Score is Mandatory.
Several small businesses assume that they cannot get a business loan if they do not have a credit score or credit history. Lenders will still offer you business loans if you are a newly launched business with a non-existent credit score or history.
You can opt for a short-term loan to fund the requirements of your business. In such a case, you can pledge an asset to increase your chances of getting the loan. Also, you might have to provide a suitable business plan or show your venture would be profitable enough to repay the loan or a Guarantor.
- You can Only Go to Banks for Business Loans.
Public and private banks are the most preferred options when it comes to any loan. But, it is wrong if someone believes traditional banks should be the only option for availing business loans.
Today, there are several options where you can apply for business loans. Various NBFCs, micro-financing lenders and fintech platforms offer loans at attractive interest rates and terms to businesses.
- Interest Rates Cannot be Changed.
The interest rate is one of the most crucial factors borrowers check before applying for a loan. Much of your repayment will depend on the loan interest rates. Now, in the case of business loans, your lender will consider various factors before setting up the interest rate. It will consider your personal credit history, previous loan settlements, business plan, turnover, business vintage and many other factors.
You can negotiate for a lower interest rate if you have a high credit score or your MSME has a CIBIL rank between 1 to 4. This would mean you can save on the interest payment and use that money to increase the cash reserve.
If you are an entrepreneur planning to launch a new venture or take the existing business to new heights, you should look for funding via loans. You should avoid any misconceptions and consider the benefits. Conduct thorough market research, assess your requirements and choose a suitable lender.
Frequently Asked Questions
Q1. Can I close my business loan early?
Ans. Yes, you can pre-close your business loan before the chosen tenure. However, make sure to check with your lending institution if there are any charges associated with it.
Q2. How does business loan repayment take place?
Ans. You need to repay business loans in the form of EMIs. You will need to provide post-dated cheques and an ECS mandate to the bank or lending institution providing you with the loan.
Q3. Can I know about the EMI before I apply for a business loan?
Ans. Yes, you can determine the loan EMI amount before you choose a business loan. There are online EMI calculators where you can instantly calculate the monthly instalment amount by providing the loan amount, tenure and interest rate.
Q4. Why should I avail a business loan?
Ans. You can take a business loan to either launch a new business venture or provide the much-needed capital infusion to help an existing business grow. You can meet the working capital requirements and help your business expand.