Common Misconceptions About Business Loans

1. Only Banks Offer Business Loans

Reality: Besides traditional banks, there are non-bank and private lenders that can provide loans to businesses, especially small enterprises and those just starting up. Each lender has different requirements, interest rates, and loan terms, so it’s crucial to compare lenders before applying.  In addition there are also specialist lenders dealing with invoice finance and equipment finance too.

2. Business Loans are Unattainable for Startups or Small Businesses

Reality: While it’s true that banks may prefer to lend to established businesses, startups and small businesses definitely have options. Some lenders will take into account a new business’s contracts or forecast and offer finance to support growth.  This is especially true if you need to purchase equipment and machinery.  

3. Perfect Credit is Required

Reality: Credit requirements vary by lender. Some non-bank lenders focus more on the business’s cash flow and a capacity to repay compared to a director’s credit score – this is especially true of unsecured lenders, invoice finance and specialist equipment finance. However, those with especially low credit scores and defaults may have their lending choices limited to first and second mortgages offered by private lenders.

4. The Application Process is Always Complex and Lengthy

Reality: The loan application process does not have to be complex and lengthy. Some non-bank lenders can approve loans in less than a day with a read only view of business bank statements and no document requirements.  While banks typically offer the broadest suite of lending products and the cheapest rates, they still have the longest process but we expect them to be working hard to improve this as non-bank lenders continue to grow market share.

5. High Interest Rates Are Inevitable

Reality: Interest rates are influenced by several factors, including the lender, creditworthiness, and cash rates set by the Reserve Bank of Australia. While some business loans may have higher rates, understanding how to make the right choices around lender selection will lead to the cheapest rates.

6. The Best Business Loan is the One with the Lowest Interest Rate

Reality: A lower interest rate is highly favourable because it usually means lower repayments. However, seeking low interest might not always be the best for your business. For instance, a lower interest rate may be tied to additional charges, which will make your repayments just the same as when you choose a higher-interest loan. Other factors to consider is the security as some banks can restrict future lending and take security against your business assets through the use of an AllPAAP under a General Security deed.  An AllPAAP stands for All Present and After Acquired Property and can be difficult to get around if you want to raise capital against equipment you own but your bank won’t allow you.

7. Security is Always Required

Reality: Not all business loans require tangible security. Unsecured loans can be obtained without putting property security on the line. Because they don’t require valuations, like a secured loan would, and their document requirements are low to none, you can get approved for an unsecured loan super fast.

8. You Must Have a Detailed Business Plan to Get Approved

Reality: While a solid business plan can certainly help, especially with applications for bank funding, not all financing sources requires this kind of supporting documentation. Lenders will typically focus more on your business’s current financial performance, credit history and score, balance sheet and are more likely to ask for a 12 month forecast than a business plan.

9. Rejection From a Bank Means Rejection from Everywhere Else

Reality: If ever your loan application gets rejected by a bank, all hope is not lost. There are plenty of non-bank lenders that look to fill the gaps left by the big banks. Even businesses with outstanding tax debt can get approval for finance from many lenders that offer competitive rates.

10. Business Loans Are Always a Sign of Financial Trouble

Business loans are not only for those going through financial struggles and much of business lending is to fuel growth. Many business owners seek loans to invest in better equipment, their premises, people and new markets. Some use loans to improve or add to their products and services. While business loans for cash flow and tax debt consolidation certainly exist, it’s very much not the case that business loans are a sign of trouble for a business.