Like many small businesses, auto repair shops are constantly recalibrating to maintain the right balance between having enough inventory on site and keeping their cash flow strong. Customers get frustrated with “we have to order the part.” You don’t want to get a reputation for long delays in fixing cars while waiting for parts. On the other hand, you don’t want to (or can’t) absorb the expense of buying and storing a wide variety and volume of car parts.
You certainly don’t want to risk the inventory you do have by using it to secure a business loan. That creates tension with your cash flow, because you don’t want to risk that by outlaying cash to invest your business. Maybe you want to bring on new staff to meet the needs of a new fleet contract. Maybe you winter is coming up and you want to run a marketing campaign encouraging winter car checkups for all those people driving around in older cars.
Whatever investment is going to grow your auto repair shop, you don’t want to risk either your inventory or your cash reserves on it. That’s where unsecured business loans become an option.
ADVANTAGES OF AN UNSECURED BUSINESS LOAN
- You don’t have to risk any assets to secure the loan. A secured business loan requires you put something of value that the lender can take in case you default on your own. For many small business owners, this might be their home (really bad idea) or the business’s equipment or inventory.
As an auto repair shop, you’re not going to get very far without your equipment or any inventory. That’s why the names notwithstanding, an unsecured business loan is less risky for the borrower than a secured business loan. In fact, an unsecured business loan shifts the risk to the lender. Of course, you’ll pay more in interest to compensate the lender for carrying the risk. But a higher APR can be a smart trade-off for protecting business critical assets.
- It can be easier to get an unsecured business loan. Sounds counterintuitive, I know. You’d think banks would be happier giving a secured business loan. The truth is, there are administrative and regulatory costs associated with securing a loan. In addition, banks aren’t that thrilled with making business loans to auto repair shops in the first place. You probably know that already.
But alternative business lenders who provide unsecured business loans typically have more streamlined application processes and require less paperwork. That makes an unsecured business loan easier and faster to get than a secured bank loan.
- The amount of your loan isn’t limited by the collateral you put up. Since the point of putting up collateral is to make a lender whole in case the borrower defaults, lenders aren’t going to want to loan more than the value of the collateral. You may need $15,000 to upgrade some diagnostic equipment, but if you only have $8000 worth of inventory on hand, you’re not going to get what you need.
You don’t face such limitation with an unsecured business loan. A lender will be more flexible with higher funding amounts and work with you on terms, based on your business’s history and projections.
- If you do default, it’s more difficult for the lender to collect. I don’t just mean because the lender can’t claim the collateral that would have backed a secure business loan. A lender needs to get a court order before it can claim any of your business property. A court may also discharge unsecured business loans in case of bankruptcy.
MINIMIZING THE RISK OF AN UNSECURED BUSINESS LOAN
While unsecured business loans are great options for small businesses, they are a financial and legal obligation. They all come with different risks. Here’s how you can minimize your risk when taking an unsecured business loan.
- Never borrow more than you need. That can send you down a dangerous path.
- Have a defined, realistic plan for how you’ll use the money. This helps with not borrowing more than you need. To know how much money you need to borrow, you first need to know exactly how you intend to use the money. But this is only the first part of the plan.
You also need to know what you expect to get from it. That helps you clarify what sort of terms you can work with, like whether longer term and lower payments for a higher APR make sense. Or it may be that the investment you’re making with the business loan cash offers a reasonable expectation of being able to manage higher monthly payments.
- Use this as an opportunity to start a relationship with an ethical, reputable business lender. Small businesses often find themselves looking for outside funding for different reasons at different times throughout the life of the business. You can minimize that stress by forming a relationship with a funding provider you can trust.
TAKING ADVANTAGE OF AN UNSECURED BUSINESS LOAN
While you don’t need any assets to secure the loan, there are underwriting requirements. Unsecured business loans can come in as low as $5000 or go as high as half a million dollars. Based on how much you’re looking for, lenders will look at both your personal credit and the operating history of your business to determine your creditworthiness and what terms make sense.
If you do have a credit score and operating history that qualify you for an unsecured business loan, it may provide the funding you need to take advantage of new opportunities. There’s a lot of business out there, why shouldn’t you get your piece? Whether you need more space, more people, or more marketing – an unsecured business loan can be a great springboard to growth.