Many small and medium-sized businesses may need additional financing at some point in their lives. This could be for business expansion, purchasing assets, updating buildings, improving service or building working capital. An SME loan comes in handy during times like this as an SME owner can get it quickly without pledging assets as collateral.
Attractive interest rates, flexible repayment terms and fast approval make unsecured business loans a popular financing option among business owners. However, getting unsecured business loans may seem complicated due to the various myths surrounding it. These misconceptions keep people from exploring these convenient financing options. We clarify some common unsecured business loans for SME owners to avoid any doubts about these structured finance solutions.
Myth 1: Only sinking companies borrow loans
Many SMEs avoid borrowing because they believe it will damage their reputation, as only sinking companies borrow loans. This is not true. Although one Business loan can come as a savior for sinking businesses, many prosperous entrepreneurs also borrow them to purchase land, purchase stock, hire staff, improve inventory, expand the business or meet their working capital needs.
A direct business loan provides resources to improve and help a business scale when it’s time to expand or take advantage of opportunities.
Myth 2: A small business cannot qualify for a larger loan
Many entrepreneurs assume that they cannot qualify for a larger loan because they run a small-scale business. However, that is certainly not true. Loan providers examine larger loan applications from businesses of all sizes. All it takes to take out a larger loan is a sound financial position to repay the amount borrowed. Loan companies ask for relevant documents to see the credibility of the company, and if they are satisfied, they offer loans based on the various eligibility criteria and not just company size.
Myth 3: A borrower must have a perfect credit history
Many small business owners believe they must have a clean credit history to get an instant business loan. Well, it’s a big myth around business loans. While a good credit history increases the likelihood of a loan being approved, a squeaky clean record is not always required.
The minimum credit score requirement varies based on the loan type and provider policies. Since credit score plays a vital role in getting an SME loan, improving it is always the best idea. So even if your personal or business credit score is low, you can gradually improve it and get a loan when you get a good score. In addition, loan providers also consider the applicant’s revenue and business performance to approve loans, not just credit score.
Myth 4: Business loans put assets at risk
Many small business owners are afraid of losing their assets while applying for a business loan. It is true for secured loans that require collateral to secure a loan. If the borrower defaults on such loans, the lender can take possession of the property and sell it to recover money.
However, that is not the case unsecured business loans. Loan applicants do not require collateral to obtain these loans.
Myth 5: Business loan procedures involve a lot of paperwork that takes several days to complete
The myth was confirmed when traditional loans required multiple site visits and lots of paperwork to process. Modern NBFCs like Clix Capital support online loan applications, saving the borrower a lot of time and effort. When applying for an unsecured business loan, applicants must do very little documentation work. A few financial documents, title deeds, identity and address proofs are usually enough to process a business loan application.
Myth 6: A formal business plan is necessary to get an SME loan
This myth is also rooted in traditional loan procedures. Traditional lenders used to request formal business plans to approve loan applications. This is no longer the case. Loans offered by NBFCs are now approved based on company and applicant credit history, annual revenue and other financial information. However, preparing a business plan is helpful as it helps a borrower know where to use the loan amount and how to take maximum advantage of it.
Myth 7: Interest rate is the most important factor to check when comparing loan offers
Interest rate is essential before borrowing. But there are several other factors to consider when getting a loan, such as prepayment fees, loan litigation costs, and late payment penalties. These are additional costs that contribute to the total borrowing cost. Therefore, consider them before choosing one.
Aside from the interest rate and additional fees, an applicant should pay attention to several other factors when comparing loan offers, including eligibility criteria, documentation requirements, customer service, repayment terms, loan amounts, and flexibility. All these factors are crucial in choosing the best loan plan apart from the interest rates.
Myth 8: A low credit score means no loan approval
A CIBIL credit score of at least 700 is a minimum to avail an unsecured business loan from major NBFCs and banks. However, a lower credit score does not necessarily mean that a loan will be rejected. Low-rated SME owners can still get a direct business loan, but they have to work harder and prove they have the ability to pay back to get the sanction.
In addition to the credit history that makes up the credit score, NBFCs also consider current revenue, finances and business performance to evaluate loan applications. So applying for a loan despite a low credit score is not a bad idea if your business is on the right track.
We’ve dispelled some popular myths about unsecured business loans. You can now make an informed decision and get business finances back on track. Think, compare and choose the loan that suits you best without falling for these myths.
Don’t let these misconceptions limit your ability to get a business loan for business growth. Leave the myths behind and rise above the facts to help your business grow and stand out from the crowd.