Small Business Financing: 7 Myths vs. Reality
Discerning myth from reality in small business financing is vital to your business success.
Myth #1: The SBA lends money to businesses.
Reality: The SBA does not lend money. The SBA issues loan guarantees. The SBA, through its 7(a) loan program umbrella, guarantees partial repayment on defaulted SBA loans to the financial institution that originated the loan.
Myth #2: If one financial institution turns me down all financial institutions will turn me down.
Reality: If a financial institution declines your SBA loan that doesn’t mean that the SBA has declined or even seen your SBA loan application. In SBA lending the initial credit decision comes from the financial institution, not the SBA. If you’re declined for an SBA loan ask the declining lender if it was their institution or the SBA who declined the loan. The SBA rarely declines loan requests. If the SBA has not denied your loan request then try applying for the loan elsewhere. There are hundreds of competing lenders who all approve credit differently. What didn’t fit one financial institution’s credit box may fit another’s.
Myth #3: It’s difficult to get an SBA guaranteed loan.
Reality: Brain surgery is difficult unless you’re a brain surgeon. The same holds true with SBA lending…you must find the SBA loan expert in your community to achieve a painless SBA loan experience. Nothing is more frustrating than applying for an SBA loan with a business loan officer and financial institution who know little to nothing about the intricacies of SBA lending. Do your homework! Review the most recent year’s SBA lending statistics for your state, which can be found on the internet or at your local SBA district office, to determine which local financial institutions specialize in SBA guarantee lending. The most active SBA lenders are usually community based financial institutions with true SBA loan experts. It is not difficult to get an SBA guaranteed loan as long as you are dealing with a local SBA lending expert.
Myth #4: There are government grants which provide free money to small businesses.
Reality: The federal government does NOT provide grants for starting and expanding a business. Grants from the federal government are only available to non-commercial organizations such as non-profits and educational institutions in areas such as medicine, education, scientific research and technology development. The federal government however does provide grants to state and local governments to assist them with economic development.
Myth #5: I need perfect credit to get a small business loan.
Reality: The SBA does not require perfect credit. No lender wants to lend to business owners who have very poor credit however blemished credit with a good explanation is totally acceptable in the SBA world. There are many alternative lenders who do not require perfect credit, however your past credit problems may cost you more when you borrow. Alternative lenders usually charge high loan origination fees and above market interest rates. Loan shark interest rates take a bite out of your profits so be careful when swimming with sharks.
Myth #6: It takes a long time to get a small business loan.
Reality: The time frame to get a small business loan is generally dependent upon… 1.) The business owner’s business administration aptitude. If your business plan is written on the back of a McDonald’s napkin you probably will be declined for the loan as it appears that you do not know what you are doing. Well prepared financial statements, business plans, etc. sell you and your deal to the business loan officer and financial institution. If you struggle at business administration, but are great at your profession or trade and want to start your own business, use the services of your local Small Business Development Center (SBDC). Your local SBDC is funded by the SBA and the consultants there will help you create business plans, financial projections, etc. in order to sell your deal to the business loan officer. 2.) The type of collateral offered also affects the time frame involved in receiving a business loan. Appraisals of real estate and equipment take time. Expect at least a month from start to finish for your business loan if appraisals are involved.
Myth #7: Once I start my business, my operations will provide enough cash and I won’t need business financing.
Reality: This might be true for a few businesses, but generally most businesses experience cash flow timing differences. Example: You just delivered your first order of widgets to Wal-Mart, but Wal-Mart doesn’t pay you for 90 days. In the meantime you have no cash to manufacture your next order of widgets that needs to be delivered to Target by next week. You are experiencing a cash flow timing difference. You have a receivable from Wal-Mart that can be used as collateral or factored, but it would have been nice to have a line of credit in place before running into this cash shortage. Most business owners do not understand or have never even heard of the term “cash flow timing differences” until they actually experience one. It is critical, no matter what type of business you operate, to establish business credit lines PRIOR to experiencing a cash flow timing difference.
Bottom Line: The bottom line is that most business owners know very little about business financing. The most successful business owner’s realize that they need a business financing expert on their team from start-up through maturity of their business. A business financing relationship with an experienced business loan officer who works for community based financial institution such as a credit union is vital to your success.
Clark Irwin is a long time community based commercial lender, business owner and author. He currently serves as Associate Vice President/Northern Utah Regional Manager for University Federal Credit Union.