A small business loan is a great way to finance your business when you do not have any other way to do it. You can take a small business loan for your start-up business either from a bank or from any other commercial lender. However, before you apply for a loan for your small business start-up, there are a few things you need to consider. Ask yourself the following questions for sorting out your priorities:
- What amount of money do you need?
- Why do you need this money?
- How urgent is your need for the cash?
- How much time will you need to pay back the money?
- For how long have you been in the business?
- What is the current state of your business finances?
- How valuable collateral do you need to put to be entitled for the loan you need? Once you have cleared the above questions, it will be easier for you to decide which loan will be best suitable according to your needs. Although getting a loan for your small business may be a daunting task but when done right, it can be done very easily.
Going for the unsecured loans is one great way to deal with the problem as well. This is because unlike secured loans, you do not have to put up a secondary payment method in the form of collateral for your debt. This is rather important especially for the small business. Read on to find out why small business loans can prove to be the best way to finance a new small business venture.
What are Secured Loans?
Owing to the absence of collateral, getting your hands on unsecured loans is not very easy. However, they are a rather useful form of funding especially for small businesses. Apart from the fact that you do not have to offer any security to avail them, unsecured loans are also faster to get. Besides, in case of unsecured loans, unlike secured loans, you can borrow more than the worth of your property in the form of useful lump sum, which can be used for the growth of your small business.
However, since you do not offer any security to the lender in case of unsecured loans, the interest rates are higher than the equal amount of secured loan. This factor does not make much difference for someone starting a new small business since they are less likely to possess any worthy asset to use as collateral. In such cases, unsecured loan is the only option they will be left with.
The strength of your business plays an important role in determining your chances of getting an unsecured loan. The lender will be examining the profit margins and turnover of your small business to determine the affordability and the risk of lending. They will also be checking your previous trading history to see whether your business ventures had been successful in the past or not. Consistent revenue is the key to getting an unsecured loans and chances of getting one are thin if you do not have a strong history or if this is your first business venture.
Director Loans and Personal Guarantees
What are your other options if this is your first venture or if you do not have a strong trading history? Director loans can save your skin in this scenario. You can be unsecured loans at the cost of providing some form of personal guarantee. This means that in case the business fails to make its mark, the burden of returning the debt will be on the directors. Therefore, you can say that even the unsecured loans are in a way secured on the personal assets of the director. These assets include home equity as well.
Although this may sound off-putting to you but it is essential that you prove it to the lender how much important the business venture is for you. Therefore, personal guarantees are a strong way to show your commitment and your confidence in your small business idea.
On the same note, some of the lenders like to offer director loans as well. Although this is a form of personal loan but it must be used only for business purposes. This is a huge way to show your loyalty to the lender since it is personal borrowing for a business commitment and not the other way round.
Although the exact conditions of the personal guarantees and the director loans vary but they include personal equity in some form for lowering the lender’s risk in case the business fails to run as planned.
Revolving Credit Loans
In case you are looking for working capital buffer instead of a lump sum for either project funding or growth, then it is a good idea to go for revolving credit facilities. These are a form of unsecured loans, which are used on the ad-hoc basis. Revolving credit loans include business credit cards, overdrafts, as well as flexible credit lines.
The reason they are suitable for small business loans is that they have a huge borrowing limit. This means that you can dip into this safety whenever needed.
Unsecured Loans for New Vs Established Businesses
The deciding factor; behind whether you will get the unsecured loan for your small business or not; is the strength and profits of your business. This means that if you have a business that is already established and you are planning to opt for an unsecured loan only to expand the growth of your business, then the deciding factor will be the amount of revenue your business is generating. The lenders will also be taking into account the previous credit score of your business. They need to make sure that the risk is low before lending you the money.
However, if you are planning to establish a new business and wants cash to establish it, then you should either go for secured loans or find a way to prove your worth to the lender. Besides convincing them about the strength of your business idea, you will also have to offer some form of personal guarantee as well.
Are you ready to apply for an unsecured loan for your small business venture? Compare different lenders and find the best offer suitable to your needs at quiddicompare.