If you’re a business owner, you may find that you need to borrow cash from time to time. Whether you’re looking to expand and need some additional funds to help you grow, or you’re experiencing some short-term difficulties and need to give your cashflow a pick-me-up, it’s reassuring to know there are finance options out there to help you bridge the gap.
In many cases, people opt for a traditional business loan which usually works well for most business owners. But while this time-tested finance option can be a great choice, there are still some things to consider when you’re taking out a business loan.
In addition to the repayment terms and interest rates, one of the main things you’ll need to think about is which type of loan you’re eligible for as there are usually two: secured and unsecured. After all, you may need to put down collateral depending on which type of loan you’re offered.
With an unsecured business loan, you won’t need to worry about collateral, however these loans aren’t available to everyone, particularly if you have poor credit as the lender will see you as high risk. If that’s the case, it’s likely you’ll be offered a secured loan, which means you’ll need to put down something as collateral, which the lender will seek to take possession of in the event you default on your repayments.
To most business owners, this shouldn’t be an issue as the vast majority will be confident that they can keep up with the payments without any problems. For those wondering what their options are, here are 4 types of collateral you can use for a secured loan.
If you own a house or another type of property, then you should be able to use that as collateral for a loan. This is one of the most common ways to secure a loan as the lenders are likely to approve your finance application due to the high value of property and the fact it holds its value well overtime. A word of warning though: be sure not to borrow too much or agree to unaffordable repayments as you could lose your home if you default on your payments.
This could be a safer option (for you at least) as you won’t be out on the streets in the event you fail to make regular payments! If you have some high-value equipment or machinery, then you can put this up for collateral as long as the value exceeds the amount you’re trying to borrow. Although this is a safer bet, you may be limited by how much you can borrow, and the lender might not be as keen on this option.
Another form of collateral that’s very common is inventory, where businesses put up their stock or raw materials in exchange for a loan. The amount you can borrow will obviously depend on the value of your inventory and you’ll risk losing the backbone of your business if you default on your loan, but this is one option many business owners find appealing nonetheless.
Having outstanding invoices can be extremely frustrating when you’re experiencing cashflow issues, but you can use these owed payments as collateral to support your loan application. If you go with this option, you’ll get cash up-front and once the invoice needs to be paid it’ll be collected by the lender instead. This type of borrowing is also known as invoice finance.
Again, the amount you can borrow will be limited – this time to the value of the invoices – and you’ll need to pay fees, but it represents a good option if you’re keen to unlock the capital tied up in unpaid invoices.
Merchant cash advances
Those are the four main types of collateral a business can put down to secure a loan. If none of those seem appealing to you or you’d rather not risk your assets, there is another finance option: merchant cash advances.
A merchant cash advance is where you’re given access to a sum of money by a lender, but instead of the regular repayments you’d associate with a traditional loan, you pay back an agreed percentage of credit/debit card sales. The advantage is you don’t need to put up any collateral and even those with poor credit are eligible as credit checks aren’t carried out on applicants.