If your small company requires more cash than can be accommodated credit lines, it may be inevitable to fund expenses through a small business loan. As with any method of financing, debt structure and payment plans will depend on the lending source, credit history and the overall health of the business. However, the first decision a business owner needs to make is deciding what type of financing works best for them. In this post, we will look at three examples of funding; Unsecured Business Loans, Secured Business Loans, and Alternative Financing.
For entrepreneurs with excellent credit, an unsecured business loan may be an option. However, this type of funding factors added risk to the lender, since if the borrower defaults, there is no asset to secure. For this purpose, unsecured loans typically have rigorous eligibility criteria and raised interest rates. Banks may also demand a separate security as an alternative to collateral.
In the case of a default on an unsecured loan, the bank may seek legal action upon you, file your default with a collection agency, or sell the debt to a third-party who will pursue you. Depending on the bank a personal guarantee may be required on your unsecured loan. Which means the bank could seize individual assets if a default is registered. Businesses that need large cash amounts and expect to pay off in a short time frame should look into unsecured loans.
Upside: Unlike a secured business loan, unsecured business loans are not attached to a value of an underlying asset, which indicates you could receive the funding in a shorter time frame by bypassing lengthy appraisal processes.
Downside: This method of funding is typically more costly and frequently comes with shorter repayment terms. Getting approved for an unsecured business loan can be difficult. To qualify for this type of financing, lenders will require that your company has been in operation for several years with substantial revenue and positive cash flow. The business owner will also need an outstanding credit history.
Secured business loans are the most traditional kind of loans because they are secured by a collateralized asset, like a piece of equipment, commercial real estate, or inventory. In the case of default, the bank will seize ownership of the secured asset(s) and may try to recover their loss by selling it off. Examples of collateral that could be used for this type of financing include; cash, property, outstanding invoices, inventory, equipment, and vehicles.
Like a secured business loan the bank will require several years in business with positive revenue and good to exceptional personal credit. Owners that want to mitigate their risk with extended payback periods and lower rates should look into a secured business loan.
Upside: Traditional banks are most likely willing to work with a borrower when the loan is secured by an asset. High dollar investments in large equipment purchases or real estate that you are looking to pay off over an extended time (up to thirty years in some cases) a secured loan may be the best option. Having the loan secured by an asset also lowers the risk for the lender, and therefore missing a payment or being late on an installment or two won't cause a default right away like other loan programs.
Downside: Accepting a secured loan gives the lender the legal right to seize your collateralized asset in the event of default or failure to continue payments, without a court order. Secured loans are restricted by the value of the pledged asset which could reduce the funding amount approved.
Business Cash Advances are a unique solution to secure funding when a Secured or Unsecured loan is not an option. There are a few essential factors that separate business cash advance from a traditional secured or unsecured business loan. Mainly, there is no APR percentage or interest rate. Instead, factor rate is defined and used to determine the total amount of future sales owed. Additionally, a business cash advance does not carry a standard monthly payment instead the payments are made in small incremental amount either weekly, bi-weekly or daily.
Upside: These types of fundings are not backed by a bank and do not require a personal guarantee or collateral. Excellent credit is also not required for approval as the approvals are based on the overall health of the business and gross sales.
Downside: Business Cash Advances are typically approved at 50-75% of the business’ monthly deposits. Which means the approval amounts may be lower than expected. The terms of a business cash advance are much shorter than a traditional loan with terms ranging from three to 15 months, and the rates are higher than conventional loans.
Conclusion: Unsecured vs. Secured vs. Alternative Financing
For startup businesses, a secured business loans may be the only option possible, without business history it may be difficult to get approved any other way.
For established companies prepared to repay higher percentage rates, an unsecured business loan can offer the versatility needed and, higher funding amounts and shorter approval cycles. Though, the guarantor will be personally responsible if the loan defaults.
For established businesses with a challenged credit history or looking for fast access to capital, a business cash advance may be the most viable option. With approvals generally within 24 hours and funding in less than 72 hours, a business cash advance can put the capital you need in your account when you need it.
Researching alternative lending options for hiring? Check out BizLender online or call 855-404-3070. Offering lending solutions since 2013, their professionals emphasized working smarter, not harder, using technology to fund small businesses in as little as 24 hours.
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