The economy is impossible to predict, but don’t tell that to economists. Sure, maybe an expert can correctly estimate what the cost of gas will be in a month, but that doesn’t mean he can estimate precisely the cash flow of your small business. There are so many factors that affect a small business. You hire a new employee, and you see your employee compensation costs rise. A vendor supplies several crucial products to your business. If just one of those items increases in price, you feel it immediately. People move into your city because a new company was hiring. You see an increase in clientele.
The list goes on. You can come up with many reasons why your cash flow increases or decreases in your small business. Sometimes it is expected. Sometimes you plan for it. But sometimes you don’t see it coming, and you’re in a difficult position. You were saving up for that new POS software, but now you’re a little short, and you need that software now. You were ready to expand your small business, but now you’re cash-strapped. You were just offered a partnership with another business, and you don’t want to turn it down, but you don’t have enough cash on hand to pull off the deal.
What are your options? It seems you must choose between saying “no,” waiting until you have enough money (which could be a long time), or getting a small business loan. Assuming you don’t want to say “no,” and you don’t want to wait, a small business loan could be the boost your business needs. There are many lenders out there eager to offer assistance. How do you choose a lender?
SECURED VS. UNSECURED BUSINESS LOANS
Small business loans generally fall into two categories: secured business loans and unsecured business loans. A secured business loan requires collateral. You put up something valuable as collateral, and this allows the lender to offer a business loan at a lower rate. The collateral reduces the risk for the lender. If you default on the business loan, the lender takes the collateral.
Saundra Latham, in talking about small business loans from banks, writes: “Sounds great, but these loans require a lot of collateral and can be notoriously hard to secure. Even though small business lending has rebounded this year (2014), the nation’s largest banks were still approving only 20.8% of requests in November 2014.”
Banks and other financial institutions typically offer secured business loans. The process for getting approval is usually much lengthier, and approval rates are much lower than with other types of loans.
An unsecured business loan does not require collateral. With no collateral, this increases risk for the lender. If you default on your business loan, the lender does not have something valuable to keep in place of your repayment. This is in your favor as a small business owner.
What else is in your favor? Approval rates are much higher, but the biggest advantage is speed. If you need money this week, you can probably get it this week – without collateral. Again, Latham writes: “The advantage of going online is speed: Most lenders can get you your money in a week or less. Applications are typically much less time-intensive, too.”
Which type of business loan is best for your small business? You might think that I want to encourage you to consider an unsecured business loan, since that is one of the options we offer at United Capital Source. But the truth is that I want you to get the funding that is right for you. Perhaps you don’t mind giving some collateral in return for the security of a secured business loan. Maybe you like doing paperwork. Maybe you’re not in a hurry and can wait weeks or months for the money to come in. Maybe you need a business loan that is bigger than most alternative lenders can offer.
But I know that there are many small business owners who don’t have collateral to offer. Or they hate paperwork. Or they need the money as soon as possible. And if that’s you, then you should consider an unsecured business loan. The right business loan can help your business thrive in almost any economic conditions.
It is unwise to consider any kind of loan—personal or business—without weighing the risks. There is no such thing as a loan without risk. If anyone tells you differently, run as fast as you can. Risk is unavoidable. You put your neck on the line when you opened (or acquired) your small business. That’s your reputation out there. You care about your reputation and your business. And the same thing applies to your business loan.
Describing the risks is one way to discuss how a business loan can hurt your business. You need some funding to help your business, but you have to take risks, which potentially could backfire and hurt your business.
You should think carefully about some of these questions and their respective answers when considering getting a business loan:
- What if you miss a payment?
- What if your business fails? What about your business loan?
- Will declaring bankruptcy clear all your debts?
- What collateral could be required for this business loan?
- What makes this business loan riskier than a different one?
- What is the difference between these lenders?
Marco Carbajo says in https://www.sba.gov/blogs/which-unsecured-business-lines-credit-are-best-your-business, “In a recent survey conducted by the National Small Business Association, ‘29 percent of small business owners report having their lines of credit reduced in the last four years and nearly 1 in 10 had their line of credit called in early by the bank.’”
A business loan could hurt your business if the amount is too much. Example: You could get a business loan for $1,000,000 to purchase equipment, furniture, and office space. After you make all these purchases, you still have $400,000 left over. Instead of borrowing the amount you needed, you now have to pay back 40% more (plus interest) than what you really needed. That hurts.
A business loan could also hurt your personal credit and/or your business’ credit. Defaulting on a business loan puts your business at risk for the present and the future. Bad credit can make it very difficult for you to secure financing in the future. Although there are lenders who advertise that bad credit is not a problem, the truth is everyone should strive for good credit. So don’t take out a business loan unless you can pay it back. Common sense applies here.
HOW TO MINIMIZE THE RISKS
You cannot avoid risk, but you can plan for it. You might have heard the phrase, “Take calculated risks.” I take that phrase to mean business owners should make a plan and a blueprint for their business. Define goals. Where is your business now? Where do you want your business to be in five years? If you need to take out a business loan, how is it tied in directly to your business goals? This kind of planning helps minimize the risks.
Don’t take unnecessary risks. Don’t put your business at risk unless you have to. Be aware of what risks you’ve already taken, and what your business partners are doing. Avoid mixing personal finances with business finances. Keep them separate if you can.
When shopping for a lender, check the credentials of the lender. How long have they been in the lending business? Read their testimonials. Talk with their clients. Don’t blindly apply without speaking to someone who works for the lender. You want to build trust with your lender, and your lender wants to build trust with you. Shop around. Talk to at least three lenders before you decide. Compare their credentials, experience, offerings, and terms. If you do your homework, you will feel more confident in the lending process.
Be careful with stacking multiple business loans on top of each other. Some business owners do this without meaning to. They intend to get one business loan. They get the amount they need, with payments they can handle. Then they run into a cash shortage and get another business loan. This puts the first business loan into jeopardy. When the original lender approved the first loan, it was based on the current status of the business. Now with two or more loans, the business cannot sustain monthly payments to multiple lenders.
Brock Blake writes about small business loan stacking on Forbes: “Now, where the real problem occurs is when this scenario happens 1-3 more times, where suddenly that small business has five unsecured loans or contracts, which of course they can’t possibly pay off, so they go under. This not only hurts the business owner, but it hurts the original lender.”
Enough of this talk about risks. You want to enter the business loan process with your eyes wide open, but don’t forget the point. What’s the big payoff for a business loan? Only you and your business can answer that — but I bet it is connected to . . . Success! If you make a plan, and you stick to your plan, you can achieve the success you’ve been longing for. Your business loan is not just a chunk of money. It is an investment in the success of your business — for the short term and for the long term. Keep your eyes on the big prize — a business loan can help you reach your goals.
Just think about how that new equipment will look in your office, restaurant, or worksite. Picture how beautiful the remodeling will look when it’s finished. Imagine the new products and services you can offer — once that business loan kicks in. You’ve been dreaming about expansion for years — is this finally the time to expand into a new office or better location or ideal territory? And sometimes that business loan can help in the most practical ways — payroll! Your employees will thank you when their paychecks arrive.
HOW TO MAXIMIZE THE REWARDS
You want to make the most of your business loan? First, use the money exactly how you intended to use it. Don’t apply for the business loan, and then change your mind as soon as the cash is available. Make a plan and stick to the plan.
Recognize the ebb and flow of your business. Look over a calendar and note when you had less cash, when business was slow, when you had bigger expenses than normal. Also, highlight the good times — when you acquired some new customers, when some insurance reimbursements came through, and when your marketing campaigns paid off. If you do this, it will really help you in planning for funding.
Read the fine print of your business loan. Pay back the business loan according to the terms. Be aware of penalties for paying back the business loan in full earlier than the payment schedule. Make sure you’re not missing any information about fees, fluctuating rates, or payment terms.
Finally, measure the impact the business loan has on your business. Your ultimate goal is to see your business succeed. Sometimes you need additional funding before you see those profits rise. But keep your goal in mind. You’re not getting a business loan for no reason. You get a business loan so that someday, possibly in the near future, that business loan will pay off hugely for your business. Can you picture it? Sure you can! Plan for it, measure it, and then evaluate it. See how much that business loan really made a difference.