Jun 18, 2019

6 Startup Loan Myths You Should Stop Believing

There’s a list of things you need to make your startup a success: a great business idea, a rock-solid business plan, and of course, working capital to get it off the ground.

From bootstrapping to angel investors to borrowing from friends and family, there are plenty of ways to finance a new business. A startup loan can trump them all for flexibility, funding speed, and convenience.

There are certain misconceptions surrounding startup loans, who they’re for, and how they work. If you need funding for your new business, here are 6 myths to know about startup loans.

1. A great idea gets the bank loan

Your bank may be the first place you look for a business loan for your startup. While banks can and do make startup loans to new businesses, it takes more than just a killer concept to get approved for funding.

Banks (and other startup loan lenders) look at the bigger financial picture. They take things like your business plan, operating history, credit scores, collateral, assets, and debts into consideration when deciding whether to approve you for a loan.

So yes, a great idea matters for getting a bank loan, but it’s not the only thing you’ll need. Taking time to assess your financials–checking your credit scores, reviewing business financial statements, taking stock of your assets–can help you prepare.

2. Getting turned down means your business is a failure

Applying for a startup loan only to be told no by the lender isn’t exactly encouraging. It could even make you second-guess whether you should be getting into business in the first place.

But getting turned down for a startup loan doesn’t mean that your business is going to tank. It just means that you didn’t meet that particular lender’s requirements to qualify for a loan.

In that scenario, you have 2 options. You can review the lender’s requirements to see what you can work on to improve your odds of being approved the second time around. Or, you can move on and try again with a different lender.

Not getting funding right away can be a setback, but it doesn’t have to stop you from launching your startup.

3. It’s easy to get a startup loan

If it were easy to get a startup loan, everyone would do it. The reality is that getting a startup loan means proving yourself to lenders to a degree.

In a loan situation, the lender’s carrying the risk, particularly with a newer business that has yet to establish itself. Comparing different loan options can help you narrow down the list to the loans you’re most likely to qualify for.

And don’t limit yourself to loans only–a business line of credit or business credit card could be another way to finance your startup in the early stages. They can also help you establish business credit, which could help you to secure a startup loan down the line.

4. Startup loans are just for online businesses

Online lenders have made getting a loan easier and faster for startups and established businesses. But it’s a myth to think that startup loans are only an option if you have an online business.

Many kinds of businesses can benefit from startup loans, including:

  • Pop-up stores
  • Yoga studios
  • Lawn care businesses
  • Food trucks
  • Dog groomers
  • Cleaning services

Bottom line? Don’t think a startup loan isn’t an option if you have a brick-and-mortar or local service-based business.

5. You can only get a startup loan if you need a lot of capital

Some startups require millions of dollars to get off the ground; others launch on a shoestring.

A big myth surrounding startup loans is that they’re just for businesses that need huge amounts of capital to get going. Some lenders that offer startup loans in the 6-figure range, but you can also find loans for much smaller amounts.

They’re called microloans and there are several lenders, including the Small Business Administration, that offer microloans for startups. These loans typically have a maximum borrowing limit of $50,000.

So, if you need $10,000 to cover marketing costs or $20,000 to buy equipment for your food truck, a microloan could be the answer. The advantage of getting a smaller loan for your startup is that it’s less debt to pay off as your business grows.

6. Taking on a loan is bad for your startup’s financial health

There are 2 camps when it comes to business financing. There’s the side that says taking on any kind of debt is bad for business because it drains money away from your cash flow. Then there’s the side that says debt can be good if it delivers a solid return on investment.

Getting a startup loan can be more attractive than other financing options. Bootstrapping, for instance, might be difficult if you don’t have a lot of cash in reserves to funnel into your business. Borrowing from friends and family could lead to strained relationships if you’re not able to pay the money back on time (or at all). And accepting funding from angel investors or venture capitalists means giving up some of your ownership in the business.

A startup loan eliminates those headaches. Yes, you’ll have to pay it back, but it could be worth it if the upfront funding from the loan helps you lay the foundation for a profitable business. If you’re on the fence, consider the ROI, in terms of how much revenue a loan could potentially help generate.

Don’t Let Startup Loan Myths Keep You from Growing Your Business

Getting a startup loan may be new territory and these myths could keep you from making a move. But knowing what’s fact–and what’s fiction–with startup loans can help you take the next step toward getting the funding your new business needs.

It takes a little cash to change the world.

So what are you waiting for?

About the author

Rebecca Lake
Rebecca Lake
Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.

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