Business loans are often sought after by small businesses and start-ups for expanding operations or for working capital expenses. While it can be hard to get a business loan sanctioned, Indian government has introduced loan schemes and policies that will help small businesses get easy and collateral free loans at low interest rates. However, there are several myths and misunderstandings about business loans that still exist in the minds of business owners.
In this article we will delve into these myths and debunk them with facts.
Myths around business loans
1. Business loans need collateral
While most banks/NBFCs ask for collateral as security for the loan, there are business loans that don’t require collateral to be submitted as security. Many businesses don’t have collateral to offer as they are just beginning their operations. These businesses are the ones that need financial support the most.
Many financial institutions offer unsecured business loans which don’t require any security, for example, business expansion loans, business loans for start-ups, etc. The applicant may have to provide a personal guarantee and promise to repay the loan along with interest charged.
2. Only banks provide business loans
This is a common myth about business loans. There are multiple financial institutions in the country including Microfinance Institutions and NBFCs that provide small business loans. Now there are fintech startups that provide unsecured small business loans at attractive interest rates.
3. Loan sanctions require a perfect credit history
A common small-business loan myth is that a business needs flawless credit history to apply for a business loan. Though it is true that most lending institutions ask for a credit score of 700+ or 750+ for sanctioning a loan it is not a necessity. Businesses with a low credit score can apply for a business loan as well.
Banks usually have their own credit evaluation system which looks at multiple factors to determine a business’s creditworthiness.
4. Only huge loans are approved
Another myth is that banks are attracted to offering loans for a large sum of money because the return on investment is high for these loans. However, there are Microfinance Institutions and NBFCs that provide small business loans to customers. Banks also have several small business loan schemes that seek to disburse loans without collateral at low loan interest rates for MSMES, new businesses, and women entrepreneurs especially.
Also, note that small business loans get approved quicker than loans worth a substantial sum of money.
5. Loan sanctions take a lot of time
One of the common misconceptions about business loans is that the loan sanction process is time-consuming. This is not quite true.
Many financial institutions offer fast-track approval for loans these days. The number of business establishments has increased with time and so has the number of companies seeking business loans. As a result, financial institutions are facing increased competition when it comes to loan disbursals. This has forced lenders to fasten the pace of their loan approval process.
6. Loan application process is cumbersome and lengthy
Traditionally, the loan application process involved filling out several forms and attaching necessary documents. However, with the introduction of online banking, these processes have been eliminated. Now you can open your computer, visit the bank’s website and apply for a loan.
This online application process only takes a few minutes to complete, and the bank’s approval process is also significantly reduced.
Banks usually take a longer to process your application compared to NBFCs.
7. Online business loans are risky
Many business owners are of the opinion that online business loans are a risky option. There are many reputed online lenders providing business loans, not to mention banks and financial institutions offering business loans through their website. The entire application process is hassle-free. You can easily upload your documents and benefit from fast-track approvals.
Online solutions like Tata nexarc’s Business Loans will help you get an unsecured loan approval in just five minutes. Once you apply for a loan, the platform compares offers from multiple lenders and gives you the best offer.
8. There is only one type of business loan
Business loans are of many types. There are different types of business loans that cater to unique requirements of the business. The interest rate and the tenure vary according to the purpose of the loan. Here are some of the most common types of business loans:
- Working capital loan
- Business expansion loan
- Machinery loan
- Loans under government schemes
- Term loans
9. Business loans are the only source of finance
For business owners who think banks are the only source of finance, do note that there are multiple ways to raise money for your business expenses. Business owners can now look at various financing options, including credit cards, merchant cash advances, overdraft facility, invoice financing and unsecured enterprise loans. You can even explore angel investing and venture capital funding, or even equity financing against business loans and decide on the best funding option for your business.
10. You must have a business to apply for a business loan
Many think that one needs to have a business established to apply for a business loan. However, this is not true. Banks also lend to entrepreneurs who are looking to start businesses but lack the financial resources to begin a venture. In this case, lenders ask the entrepreneur to submit their business plan, revenue model, etc., to assess his/her ability to repay the loan. Also, since startup numbers in India has skyrocketed in the recent times getting a business loan without a business is a possibility.
Misconceptions about business loans might lead to missed out financial opportunities for your business. Business loans are a great way to source funding for your business but make sure that you have a way to repay them on time. Defaulting on business loans can mar your credit history which will reduce your chances of getting new loans.