Small Business Financing: Myths and Realities

Do you know everything you need to know about small business financing? Whether you’re a small business veteran or just starting out, obtaining capital is one aspect of entrepreneurship there’s a lot of confusion about.

In fact, it seems getting financing isn’t the only challenge entrepreneurs face. Simply learning about and understanding their financing options is a hurdle in itself for most small business owners. In OnDeck’s latest quarterly Main Street Pulse Report,

80 percent of small business owners say they don’t think banks do a good job of explaining what it takes to qualify for different types of business financing.
75 percent of small business owners admit they don’t know all of their financing options.
66 percent of small business owners say they don’t have a strong understanding of how business credit is calculated and how lenders use it to deny or approve financing applications.

Let me provide a little bit of education by debunking some of the most common business financing misconceptions I hear from small business owners.

1. Myth: The SBA gives business loans.

Reality: The SBA does not make direct loans. They do, however, make guaranteed loans through a variety of financing sources including banks, credit unions and non-bank lenders. The SBA guarantees a portion of the loan to lessen the risk to lenders and make them more likely to lend to small companies.

2. Myth: If the banks turn me down, I’m out of luck.

Reality: Banks are only one financing source that’s open to small businesses. Other lending sources may include community-based microloans, alternative financing methods such as merchant cash advances or factoring, credit unions or crowdfunding. The best option for you depends on a variety of factors, including how much money you need, how long you’ve been in business, your business credit history and how fast you need the money.

3. Myth: If I don’t have good business credit, there’s no way I’ll get a loan.

Reality: Your business credit score is important, sure. But it’s easier than it used to be to find financing with a less-than-perfect credit score. In the wake of the Great Recession, when banks tightened the purse strings, a variety of alternative lenders sprang up to help small businesses find the capital they needed. You may pay more for your financing if your credit isn’t stellar—that’s just how it works. But you’re not necessarily out of the running.

The study also reports that 87 percent of business owners haven’t found a resource that explains how to qualify for financing. There are plenty of them around! The SBA website and SCORE’s website have tons of information and resources. Get even more personal help from advisors at SCORE and your local SBDC. They can assess your needs, explain your options, help you prepare your application and even connect you with financing sources in your community. (Disclosure: SCORE and the LA-SBDC Network are clients of my company.)

Whether you need financing now or just think you might need it in the future, take the time today to get educated about your options. As with everything else in life, when it comes to business financing, knowledge is power.

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Rieva Lesonsky is CEO of GrowBiz Media, a media and custom content company focusing on small business and entrepreneurship. Email Rieva at rieva@smallbizdaily.com, follow her on Google+ and Twitter @Rieva, and visit her website SmallBizDaily.com to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.