small business debt and financing

4 Myths of Financing and Small Business Debt

5 min read • Nov 08, 2021 • Lendio

Did you know that insufficient funds are one of the top reasons businesses fail? A post-mortem analysis of 100 failed companies revealed that 29% of those businesses just simply ran out of money. While different variables—like poor marketing or lack of a market need—played a role in some of these failures, sometimes the reason was much simpler: the business hesitated to secure needed funding in an attempt to avoid business debt.

When starting new ventures, entrepreneurs typically turn to their reserves first or ask friends and family to invest. Even if that’s common, self-financing can put a considerable burden on the business owner—and even hinder the growth of the business. 

A recent analysis of 100 failed companies revealed that 29% of those businesses just simply ran out of money.

In cases like these, securing a loan can be invaluable. But sometimes small business owners are hesitant—or even scared—to acquire any amount of debt. 

Fueling these fears are the many misconceptions about business debt, making it hard for some owners to believe it’s a viable option that they won’t regret. Debt, despite its usefulness and benefits, is often treated as a dirty word—nobody wants to say it, let alone be associated with it.

If a loan is something you’ve been thinking about but you’re hesitant to take the next step, keep reading. We’re going to debunk some of the top myths about business debt (and alleviate some of your worries in the process).

Myth 1: Debt Means Your Business Is in Trouble

People often believe that if you need outside financing, your business is failing. They equate it to needing a bailout or a lifeline. The reality: if you’re looking to start, grow, or expand your company, debt can be good for your business.

Considering that more than 66% of entrepreneurs use their own money to start their businesses, they may find themselves short on funds when they need it most—like if they want or need to expand. Alternatively, you may not even have sufficient funds on hand to get your business off the ground in the first place. 

Small business financing could be use to fund any number of things — from basic needs like covering payroll or purchasing inventory to larger goals such as leasing a new space. It is, however, a good idea before you apply for financing for your small business to have a clear idea of what you want to use the money for.

Myth 2: Obtaining a Small Business Loan Is a Long and Difficult Process

Dreading a lengthy application and funding processes? Don’t be. While that may have been the case many years ago when applying for a small business loan or other financing, times have changed, and securing funding for your business is much easier than it used to be. 

Online innovations such as application forms, accounting and invoicing software, credit checks, and more have changed the game, decreasing wait times dramatically and improving processes.

To speed up the process and simplify your task, come to the task fully prepared with the proper documentation to help your application progress as smoothly as possible. Here are a few essentials to have on hand:

  • Personal financial records
  • Business information (e.g. profit and loss statements, future growth plan, tax returns, annual revenue, cash-on-hand)
  • Details about the amount of cash you want and how you will use it
  • Business and marketing plan
  • Personal collateral if necessary 

Myth 3: Businesses Can Only Borrow From a Bank

It’s 2021, and gone are the days when you could only receive financing from a bank. While many small businesses still utilize this traditional funding method—as evidenced by the $644 billion in loans distributed to small businesses last year—there are other options available through alternative lenders.

Alternative lenders such as direct private lenders, marketplace lenders, and crowdfunding options tend to have more flexible terms, faster processing times, and higher approval ratings. They also have different repayment terms, which can be great news, and may look at things other than just your business or personal credit history before making a decision. Remember, however, that you’ll still need to provide up-to-date financial information. And, yes, if you can enter the process with a solid credit history and rating, all the better.                                                                                                

Myth 4: Online Lenders Aren’t Trustworthy 

When online lending first emerged in the late 1990s, its impact on the financial industry was unclear. Even further, because these new options were unregulated, it was uncertain if they could be trusted.

But now, online lenders play a big role in the lending scene—so much so that in 2019, 22% of companies sought funding from online sources. Furthermore, many businesses also turned to online lenders amid the disruption of the pandemic and considered them the saving grace that allowed their small companies to survive lockdowns, slowdowns, and outbreaks.   

While online lending sources have continued to gain the trust of entrepreneurs, it’s still a good idea to do your research before you put in an application. Our advice: confirm that you understand their rates, fees, repayment terms, policies, and types of services and lending products they offer. And always check online reviews and ratings.

Business Debt Can Be Supportive, Not a Setback

Taking out a business loan doesn’t have to be a daunting experience. But just like other business decisions, you should prepare yourself with the right information to make the best choice for your company before you start the process. Read reviews, ask around, check websites, and always keep an open mind. 

 

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

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