Once you have established the need for a small business loan, the next step is figuring out what type of small business loan would work best for you. This doesn’t just refer to choosing between different business funding programs like a business line of credit, merchant cash advance, or SBA Loan. The potential borrower must also consider whether it makes more sense to pursue a business loan that is either secured or unsecured. Each option carries various advantages and disadvantages, especially if you are 100% sure that you can offer collateral that the business lender will accept.
This is the primary difference between secured and unsecured business loans: The former option requires collateral, which is something the business lender can sell to make back most of the money it will lose in the event of a default. At first, the idea of risking your car or home sounds like a deal-breaker. But when you examine the rewards that come with secured financing, the decision becomes more complicated.
Before making comparisons, you should ask yourself four questions that may make this process a lot quicker. The first concerns how much money you are planning to borrow. If you are looking for an amount on the larger side, most business lenders capable of distributing such amounts will likely only offer secured business loans. This is one of the main advantages of secured financing: higher borrowing amounts. Companies like United Capital Source, however, frequently approve unsecured business loans for amounts that are just as high as what you’d get with a secured business loan.
The second question is: How quickly do you need the money? If you need funding to be approved and distributed right away, unsecured business loans are almost certainly your only option. Secured business loans typically require substantial paperwork and a more rigorous screening process, partially due to the higher borrowing amounts. Unsecured business loans, on the other hand, require minimal paperwork and can be accessed in less than 48 hours.
The third question pertains to your ability to satisfy the repayment structure of a secured business loan. In most cases, a secured business loan is a traditional business term loan, which means you will have to make fixed payments every month. There is much more variability in repayment structure with unsecured business loans. Depending on the business funding program, you may be able to choose between making minimum payments and full statement payments. With programs like a merchant cash advance or revenue based business loan, you only have to make payments when you make sales, so a slow month means a low payment.
You already know the answer to the last question, which is how you will use the money. The money you are borrowing for a secured business loan might go directly towards the asset that is being used as collateral, like new equipment. Unsecured business loans allow you to use the money for almost anything.
If these four questions haven’t given you your answer just yet, then it’s time to consider additional pros and cons. As for interest, secured business loans tend to have lower rates since there is less risk. The terms are longer, which makes monthly payments smaller and decreases the overall cost of the loan. Even borrowers with less than perfect credit history might be able to access low rates, longer terms and a high borrowing amount with the help of collateral.
Thanks to companies like United Capital Source, collateral is not the only way for borrowers to offset credit problems. If your cash flow is in good standing, poor or little credit history will most likely not prevent you from accessing several business funding programs along with an appropriate borrowing amount for your needs. Another possible way for a borrower with poor credit to access convenient terms is by taking a smaller, short-term loan. Paying this back on time will probably make you eligible for a second, larger round of funding.
Though collateral can still be very advantageous, its previous status as a mandatory requirement is gradually being phased out. More and more business financing companies are finding that cash flow is a better indicator of a borrower’s “risk” than the value of his or her assets. Many successful businesses are also unable to provide collateral due to the decreasing commonality of home ownership and expensive business assets. So, if you cannot provide collateral, don’t convince yourself that affordable business funding programs are not an option. You just have to look in the right places and focus on improving your cash flow, which is now the chief requirement of any up-to-date business financing company.
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