All businesses need capital infusions from time to time. A government-guaranteed loan is the answer for many cash needs, like facilities expansion or inventory acquisition. Indeed, the U.S. Small Business Administration loaned over $33 billion in 2016.
But a government-guaranteed loan is not always the answer. For some businesses, the excessive paperwork and other hurdles make these loans too time-consuming. Also, from time to time, the government may refuse to loan money to certain kinds of businesses for “policy” reasons.
In situations like these, private capital from UnsecuredFinanceAustralia.com.au or another similar provider might be a better option. Most business owners can choose between secured or unsecured loans. How do you know which one is best?
Secured Business Loans
A secured loan is usually linked to real property, like a house. However, anything tangible could serve as collateral. That includes things like motor vehicles.
Before funding the loan, the lender requires the borrower to execute a security agreement. This agreement basically states that the lender agrees to provide funds in exchange for certain acts from the borrower. The biggest one is repaying the loan funds as agreed. There may be some other conditions as well, such as maintaining insurance on the secured property.
If the borrower defaults on any aspect of the agreement, the lender has the legal right to take possession of the collateral.
The upside of secured loans is that they often have lower interest rates. That’s definitely the case with regard to consumer loans. Mortgage loans are much, much cheaper than credit card loans. Since the borrower has some property at stake, there is less risk for the bank. The lender assumes that the borrower will try hard to repay the loan as agreed to avoid default.
The obvious downside is that, if the borrower defaults, the property is at risk. Almost all businesses go through “feast or famine” periods. There is either plenty of work and plenty of money or not much of either one. The happy mediums are few and far between. If your business has serious cash flow issues, you may want to think twice about a secured loan. Most lenders care nothing about the business cycle; they just want the payments on time.
Unsecured Business Loans
Most business loans are unsecured. The borrower simply makes a promise to pay. There is no additional paperwork, no loan closing to attend, and no risk of losing property if your business defaults on payments.
This ease of access is not free. Unsecured loans are usually more expensive than secured loans, mostly because the lender assumes more risk.
On the plus side, there is no property or other collateral at stake. If the payments become untenable for whatever reasons, most unsecured lenders will work with you. If an agreement cannot be worked out, the only immediate penalty is a very big hit on your business credit report. The lender could also sue you to recover the balance. The worst possible outcome is that you must repay the loan balance plus some additional fees. That’s not the end of the world.
If you have an opportunity to grow your business, take advantage of it. Opportunity usually only knocks once.