Are you planning to buy a new phone, a new car, a new laptop or a new house? The first question that pops up in your mind is, how you will find the money to get it. Isn’t it? You have several options for that; you either dig up your pockets for your savings, go for a lease, or if nothing works, a loan. That’s the standard operating procedure for buying almost anything in your life. But what should you do if you are running a business and it needs some help in financing?
People usually prefer financing their business from their savings and later on their profits to avoid the loan burden. Sometimes, your business can get an opportunity that is hindered by a lack of available cash. In such cases, companies rely on getting loans either from banks or online lenders. There are so many loan options available that a novice can get confused or spoiled for choices.
If you do not have experience beforehand, you could always go for the wrong option, and any such mistake in a business can be fatal. So how will you select among the best unsecured business loans? Worry no more as this article will give you an overview of business loans to help you with your decision making. There are various categories of loans, but first, let us talk about secured and unsecured loans.
SECURED VS. UNSECURED LOAN
Secured loans are the ones in which the lenders keep any of your property as collateral. These possessions effectively remain in the ownership of your lender until you pay back the loan amount in full. Any valuable property such as cars, houses, stocks, and bonds qualify for becoming collateral. In this way, the lender ensures that you always return the loan. With secured loans, you get lower rates, a higher limit, and also a longer-term in which you can repay your loan. Secured loans are the more traditional types of loans.
On the other hand, unsecured loans are completely the antithesis of what secured loans are. Lenders take a much higher risk by lending you something since they do not have any collateral in case you don’t return. Therefore, unsecured loans have a higher interest rate and more stringent limits and terms. Lenders usually take a deep peek into your business and credit history before deciding to loan you anything. Businesses that have been operational for longer have a better chance of getting an unsecured loan. A study shows that credit scoring models can help lenders in assessing the risk associated with unsecured loans.
GOOD CREDIT VS. BAD CREDIT
Depending on your credit background, you can also make a wise decision about the type of loan you can get. Credit agencies work out the credit score of an individual with the available information and put them into one of the five tiers of exceptional, very good, good, fair, and weak. Depending on the score, you are a less credit risk if you qualify in the top three tiers. It usually depends on the person’s credit history and how did they return loans in the past. A person with good credit has access to tons of loans with desirable terms. In terms of loans, lenders give you a considerable amount to be repaid over the years. If you are not looking for big cash, you can always opt for microloans that have a smaller amount but have the downside of higher interest rates.
Though, depending on your requirements, you might need loans with continued access to funds from time to time. In that case, the line of credit is a perfect option for you that lets you borrow, pay interest on the money you used, and then borrow more. According to research, the lack of access to the line of credit is one of the most potent financial constraints for businesses, which hinders their success.
If you have bad credit, there are options, but they will have a bit more stringent terms. Getting the best rates will be difficult, but the fact that matters is, you will still have access to funds to make your business successful and improve your credit history. You can opt for equipment financing in which you make the equipment you buy with the loan collateral. So, if you are not able to pay the loan back on time, your possessions can be legally confiscated by the lender. In this way, the lender ensures you return the loan since you run the risk of your business closing with your equipment unavailable. Merchant cash advances are another option that gives you cash fast, which you repay with a percentage. However, you have a very high annual percentage rate. Some businesses have delayed payments from their clients, and that’s where invoice factoring is helpful.
In invoice factoring, you use your pending invoices to get the cash you need and then return them once the client pays. Consequently, you never run out of money when you need it, and hence your business doesn’t get bankrupt due to delayed invoices.
WHAT SHOULD YOU DO?
This article discusses the types of loans and the requirements associated with them. Given your credit history, you now know the kind of loan you can avail of for your business. You should also figure out whether you are more comfortable with secured loans in which you put any of your assets on the line. Though, if you are not ready for that, you always have the option of getting unsecured loans that have a higher rate and stringent terms. The decision making in getting a loan also involves whether your business needs upfront cash, or would it need a constant flow of money from time to time. There are pros and cons to every option you choose. Do you need a loan? If you are getting one to help your business expand, that is a good option. However, if you are getting a loan as a last option to keep your business from going bankrupt, it will be tricky. The process of deciding on your credit is very confusing, and hence people take much consideration before opting for one. It would help if you did the same.
