Common Myths on Financing a Business

August 19, 2014 | By | Reply More

Lack of capital can often crush dreams of starting a business. Not everyone is lucky enough to be born with a trust fund or possess a huge bank account that could be used to jumpstart a business. Having the resources to start, manage and grow the business is critical to the success of any business. Without money, even the businesses with the best potential to be profitable will die an early death.

RELATED: Pros and Cons of Financing a Business

myths of financing a business

Getting funding for your business can pose a problem, especially if you don’t know where to go or whom to see. While it is not easy to look for financing to start a business, is it important to know the common myths that have spread on the Internet and beyond that are simply not true. In fact, believing in these myths could do more harm than good in your search for funds.

Common Myths on Financing a Business

Here are the common myths on financing a business that you need to avoid:

1. There is free money to start a business

You may have seen the ads, even books, proclaiming that there is free money to start a business. These are usually grants that government and private foundation gives out, without any repayment obligation. So yes, they are essentially free money!

However, what these ads fail to state is that grants, while given out, are not just for anyone and everyone who wants to start a venture. Grants are given for specific groups target groups (e.g. Indians in reservations), and mostly reserved for research and development and nonprofit organizations.

Few for-profit businesses qualify for grant programs – and when they do qualify, it is rarely to cover the entire startup costs.

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2. Banks will lend you money — even if you do not have any money

There are misconceptions that banks are your best friends who will be willing to help you just because you have a business idea. They go to the bank to apply for a loan, only to realize that banks will lend money only to those who actually have money and can prove that they can repay the loan (or if they can’t repay, have assets that the banks can seize as collateral).

It can be mortifying, especially if you spent days crafting and fine-tuning your business plan – only to find that banks will not even read your business plan if you have bad credit and no assets to speak of.

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3. There will be investors to help you jump start your home business

Just because you have what you consider to be an excellent business idea does not mean that investors will flock to you to be part of the action. It is not easy to look for investors, particularly venture capitalists. They typically don’t respond to cold calling, and you can’t just randomly submit your business proposal to them.

If you get the rare chance to talk and present your business idea to them, you better develop some thick skin and prepare yourself to lots of rejections. Have you seen the show Shark Tank? One big lesson from Shark Tank is that investors are highly selective in choosing which venture to invest. It can be heart breaking to watch when investors squash the business idea and dismiss it as something that is not worth their time and money.

Be wary of organizations or websites that claim to match you with potential investors. Instead, build up your network and try to look for influencers in your industry. It is not easy, but can be very rewarding. After all, looking for investors is oftentimes a game of who you know and who can open doors for you.

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4. You can borrow money even with poor credit

One of the common misconceptions around is that you can borrow money even when your credit record is less-than-satisfying. Unless you have a guarantor, or huge collateral that you can provide, having a bad credit record is almost always a guarantee that your loan application will not be approved. In fact, it is one of the very first things that bank look for when they receive a bank loan application.

One way to go around this problem is to let your business build its own credit history that you can use as basis for the loan, instead of your personal history. However, this assumes that you have already built the business and operating it for several years as it takes time to build a corporate business history.

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5. You can go to SBA for financing if banks reject you

It is true that the government, especially through the Small Business Administration (SBA) offer financial assistance to small businesses. SBA provides guaranteed loans from commercial lenders – so the same criteria will be applied to your loan application albeit this time the SBA will guarantee your loan.

It is important to understand that SBA itself loans no money; all it does is to issue guarantees to lessen the risk for banks that actually make the loans. Before the SBA-guaranteed loan is approved, you need to satisfy certain criteria, such as qualified management, market potential for the firm’s product(s), and adequate cash flow from operations to service debt. And yes, applying to SBA loan guarantee programs also mean that you need to present collateral (house, land, etc.).

In fact, SBA loans can be tougher to get. After all, you will be dealing with the rules of the commercial lender plus the myriad requirements that usually come when working with government. The SBA loan process is complex, and there are a lot more rules, regulations and forms that you need to submit and follow.

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Recommended Books on Financing a Business:


George Rodriguez

George Rodriguez is a writer for An entrepreneur with experience in running several businesses, he writes on various topics on entrepreneurship and small business.

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Common Myths Small Businesses Have on Financing a Business
Lack of capital can often crush dreams of starting a business. Getting funding for your business can pose a problem, especially if you don't know where to go or whom to see. Learn the common myths on financing a business that you need to avoid.
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