The advancement in financial technologies (fintech) enables small business owners to choose from a wide range of business loan products. The business loan products help entrepreneurs to run and expand their small businesses without sacrificing ownership or control. But a number of studies suggest that many small business owners are still financially illiterate. They lack the financial knowledge required to differentiate various business lending options and assess the terms of lending. They even believe in a number of misconceptions and myths about small business loans.
Demystifying 7 Common Myths about Small Business Loans
Only Traditional Banks Provide Small Business Loans
Many small business owners still explore ways to avail credit from nationalized and commercial banks. But the complex credit requirements and lengthy disbursement procedure often make it difficult for business owners to avail credit from banks. Many banks further provide credit only to established businesses. There are many NBFCs and fintech companies that provide credit to small business owners in 72 hours. They even allow borrowers to choose from various types of small business loans.
It is always important to Avail Additional Credit
While applying for a small business loans, borrowers often ignore their precise financial needs. They explore ways to borrow more funds that the current financial needs. The borrowers must remember that they have to pay interest on the additional credit regardless of its usage. It is always important for small business owners to determine their financial needs precisely and borrow the right amount. The financial need assessment will help them to avoid paying additional interest and keep the cash flow position positive.
One cannot get a small business loan without having excellent credit score
While processing a small business loan application, lenders always consider the owner’s personal credit score and the business’s credit history. But many NBFCs and fintech companies nowadays evaluate credit worthiness of an entrepreneur and provide credit based on real-time data like value of unpaid invoices and monthly debit and credit card sales. They even assess the creditworthiness of a small business owner with poor or no credit score based on the type of industry, time in business, turnover and profits of the business, and cash flow position.
Interest rate is the most important criterion to compare small business loans
While comparing various small business loan products, borrowers often focus exclusively on the rate of interest. The rate of interest on the business loan impacts the cost of lending directly. But the entrepreneurs cannot maintain a positive cash flow position without focusing on multiple factors – repayment tenure and terms of lending. Also, they need to check if the loan proceeds can be utilized to meet specific financial needs of the small business.
All business loans require borrowers to pay fixed EMIs
Both banks and NBFCs require borrowers to repay term loans through fixed equated monthly installments. But there are a number of technology-driven business loans that enable entrepreneurs to choose from multiple repayment options. For instance, many NBFCs allow small business owners to repay Point of sale business loans through multiple options – fixed daily installments and fixed percentage of daily sales. Hence, an entrepreneur can always opt for new age loan products to repay the debt in a flexible and convenient way.
There is no option to accelerate loan disbursement
Often nationalized and commercial banks require additional time to disburse small business loans. Many entrepreneurs find it difficult to avail credit on time from traditional banks. But the alternate lenders take advantage of advanced fintech to simplify and accelerate loan disbursement. There are many NBFCs that disburse small business loans within three days. They even disburse the loan digitally and transfer the funds to the borrower’s bank account directly.
It is not safe to apply for small business loans online
Most lending institutions nowadays allow borrowers to apply for small business loans through their websites. They further simplify and streamline the business loan application process by requiring borrowers to follow some simple steps. At the same time, the peer-to-peer (P2P) lending institutions even provide a robust online platform to bring borrowers and lenders together. But many small business owners still consider it unsafe to apply for small business loan online. They must take advantage of the online options to avail credit from alternate lenders offering flexible terms of lending and lower rate of interest.
On the whole, the entrepreneurs have option to choose from a wide range of small business lending options. They must compare the small business loans based on key parameters like rate of interest, repayment tenure, collateral requirement, and eligibility criteria. The initial research will help them to fund working capital needs on time without increasing cost of lending.