When you’re running a small business, every bit of capital counts. One of the ways you can save money is by picking the right type of loan.
Do you know what your options are with secured and unsecured business loans? If you don’t, you’re leaving a lot of money on the table by choosing less-than-ideal financial products.
There are different loans based on the loan term, loan amount, credit history, and a lot of other criteria. Knowing the differences will help you find the perfect one for you.
What you need to consider first is how you’ll be using the loan. This is where people tend to make a mistake.
A loan gets you cash, certainly, but you have options based on the purpose of that cash. A loan used to buy equipment isn’t the same as the one you’ll use to cover payroll. Even though they’re both loans, their terms and conditions will be very different.
Before you apply for a business loan, take a look at these options and choose the right fit.
Invoice Financing
Invoice financing is a great option for businesses that tend to have long waiting periods for receivables. They’re essentially a way to leverage your invoices to increase immediate cash flow.
This is also known as factoring. In short, you sell any amount of your unpaid invoices to business lenders in exchange for cash on hand.
Invoice financing is a great option for both lenders and borrowers. Your company history gives them a good idea of what to expect from your customers, making it relatively low-risk.
For Commonwealth Capital, LLC, it was a great way to hold on to a client.
When one of their clients started to run into a little trouble. Commonwealth reduced their line of credit, making a bad situation worse.
To try to work something out, they met with the client and toured their facility. After assessing the situation, they provided $350,000 to the client through invoice factoring.
That extra injection combined with the line of credit did the trick. After 18 months, the client got back on their feet and re-established their line of credit entirely.
Had it not been for the extra financing, the client might have gone out of business. And Commonwealth might have lost a client.
Equipment Finance
Another favourable but specific type of loan is equipment financing. The loan application includes the equipment that the borrower needs to buy.
This kind of loan typically doesn’t require collateral. The product issuer, that is, the lender effectively owns the equipment that the loan pays for. When you repay the loan, the equipment becomes your sole property.
This is an excellent choice for new businesses that don’t meet lending criteria for traditional loans. The interest rates are relatively low compared to other options and the application processes tend to be quick.
Equipment financing saved the day for this medical startup.
HourGlass Technologies had a tough decision to make. Either outsource the manufacture of their flagship product or find financing to do it themselves.
They needed an expensive laser to manufacture it in-house. Luckily, they established a relationship with a venture funding partner.
After several meetings and discussions, they agreed on terms for an equipment loan. HourGlass was able to go into production shortly with the new equipment.
That’s the power of finding the right business lenders and the right loan. Getting financing as a new and untested company is almost impossible otherwise.
Commercial Bill of Exchange
This is a very special kind of financing option. It’s effectively a variable rate instrument. It’s basically an order to pay a sum of money at a specified date. A lot like a cheque.
It differs from a cheque in that it usually has other terms attached. It’s also not very common outside of international trade.
This option can have very low interest rates. But it usually requires a well-established business with good lending criteria. So, it’s rarely made available for SMEs.
Traditional Business Loan
Truth be told, one of the best options for low-interest financing is a simple business loan. And there’s some general advice you should follow when getting one.
This one is rarely an unsecured loan, so make sure you’ve got the collateral for it. Also, it’s probably not tailor-made for your business. Typically, they have minimum borrowing amounts.
The biggest problem with these loans is the application process. It takes a long time. So, if you’re considering a traditional business loan, don’t wait until you’re desperate.
Now, you can certainly opt for unsecured business loans. Those protect your assets and can take less time to get. But that’s going to impact the interest rate.
If you don’t want to tie your assets to a loan, unsecured business loans are a godsend. They can provide a much-needed cash injection at just the right time.
One bar owner found that out to his great delight.
John’s Crow Bar had developed a good reputation within 18 months of opening. But it was time to put the space to better use.
John had already used a secured loan and hesitated to put more of his assets into loans. Instead, he approached a lender for an unsecured business loan.
The process was much faster than his previous secured loan. The capital was available just in time to expand and renovate the bar.
Maybe an unsecured loan is right for you too. Think about what you’re using as security before you commit to a traditional loan.
Look Before You Borrow
You can’t always predict when you’ll need some extra capital for your business. But if you become familiar with your options, you’ll always make the right choice.
When you’re thinking about getting a loan, think about the purpose and your resources. What do you need the loan for and what basis can you provide for it?
Even if you need a loan the next business day, you can find someone that will provide it. But the terms are going to ruin you, so stay on top of the game.
If you’re thinking about getting a loan, let us help you find the right one. At Unsecured Finance New Zealand, we can walk you through your options. You can apply in only five minutes using our online application form.
