3 Myths of Small Business Financing

#1 – Small business loans are readily available through the local bank.

Small Business LendersI’ll start with this one because this can be very damaging for a business owner’s credit history if this process is not understood well.

In today’s credit climate, the qualifications from the major banks for a small business to get a loan or line of credit is directly related to the business owner’s personal credit, or the history of revenues related to the business, including any cash or real estate assets.

So if you could qualify for a credit card with a $20,000 limit, the major bank will likely approve you for a similar amount as a loan or line of credit.

An existing business would have to show at least two years in business and over $1M in annual revenues for each of those years. Even then, the line of credit approved can be as low as just 10% of the annual revenues. So a $1M a year business could only qualify for about $100k in credit lines or loans.

Here’s where it can get a bit dangerous. Walking into your local major bank and asking to apply for such a line of credit or loan, there’s a chance that the banker will encourage the application – not informing you that getting turned down for such a loan or line of credit could hurt your personal credit history, and impair the ability for the business owner to apply for future financing – especially if it’s through the same bank.

#2 – The SBA hands out loans to most anyone in the “Obama era.”

SBA (Small Business Administration) loans are actually just loans cut and administered by local banks. The process for applying for an SBA loan is similar to applying for any other business loan, except with one big exception –

You can not claim bankruptcy or walk away from a government backed loan!

In addition, the local banks that administer such loans will want the same fundamentals as most other loan types. Certain businesses such as a convenience store or other retail businesses may actually have a better chance of getting an SBA loan as there are real estate components to them that make for steadier, more predictable cash-flow for lenders.

One last thing to note, as the major banks have become shy of offering such types of loans, the local credit unions are the best bet to apply for an SBA loan.

#3 – Venture Capitalists would be interested in my idea.

Only a select few ever raise venture capital financing, and often those start-ups have a quickly growing revenue base or website/software/widget user base. For the most part, gone are the days when someone with “a good idea,” would be able to solicit meetings with VCs and get an initial round of funding.

There are some exceptions, however. If you have a track record as an key engineer or executive at a previously successful company, or a history building another successful start-up (even a not so successful one) your chances will be much better than someone coming in “cold” from the street.

If you are interested in raising venture capital, and think you just might have that next great idea or product, you can look for lists of venture firms, but I find the best place to do it is at conferences like Techcrunch, Demo, or The Founder’s Institute. I like the Founder’s Institute because there fees for start-up exhibitors is low, and the quality of investors and speakers is usually excellent.