If you’ve never done it before, applying for a business loan can be a stressful, confusing process. And nobody understands that better than Lisa Zimmerman.
Zimmerman is a small business counselor with Justine Petersen, which operates the Kansas City Regional Micro Loan Fund. Many of its clients are business owners who have never sought financing before or who don’t qualify for loans from traditional lenders.
As a result, they don’t know always understand how everything works. Here are some of the most common misconceptions Zimmerman has encountered on the job.
Ask for only a little money
A lot of owners don’t feel confident about their chances, so they ask for less than they actually need. That’s a mistake, Zimmerman said. So many young companies fail because they are starved for capital.
On the other hand, businesses should be careful about asking for more than they really need.
Instead, smart companies will consult with an accountant or a business counselor who can help them determine how much they will need and how they should spend it. Lenders will be much more receptive to loan requests if the business has a clear plan.
Zimmerman also recommends step-up loans. Let’s say a small business knows it will need $20,000 over the next year. Instead of borrowing the entire amount at once, a step-up loan provides $10,000—enough for half a year.
Six months later, if the company is ready for more money, another $10,000 can be rolled into the existing loan. This helps the business save money because, for those first six months, it’s only paying interest on $10,000 instead of $20,000.
Don’t ask for a loan until absolutely necessary
Many small business owners avoid debt at all costs. By the time they finally ask for a loan, the business needs a cash infusion within days.
“The reality is that’s not how financing works,” Zimmerman said.
It’s better to build relationships with lenders before a business needs financing. Lenders can offer advice directly or can connect business owners with accountants and other specialists who can say when it’s right to seek a loan. Zimmerman recommends the Women’s Business Center, Justine Petersen’s partner in the microloan program.
The only way to repair a credit score is by paying off all debt
Business owners with rocky credit histories often believe that paying off everything they owe is the only way to repair their credit scores.
While it’s important to keep paying off old debt, Zimmerman said, individuals can improve their scores without completely clearing the decks.
That’s because two factors make up nearly 60 percent of a person’s score. One, does the person make monthly payments on time, even if it’s just the minimum amount? And two, is that person limiting how much credit is being utilized on his or her active lines? Generally speaking, it’s a good idea to keep the balance under 30 percent of the line’s limit.