Most businesses fail within the first year of opening their doors, and it’s often because they failed to invest cash into their new business wisely. Even decades-old businesses can struggle financially from time to time, and the only way to stay afloat is to borrow money from a lender. You might assume banks are your only option when you need a cash injection, but there are other ways to get financing. Plus, if you decide to secure a loan from the bank, how do you know which one you need?
Banks might not always be forthcoming with all your options because they intend to make a safe profit, and other lenders often offer more favorable terms. At least if you know your options, you can turn up to the bank or high-street lender prepared to negotiate, which is why we’ve detailed the most popular business loans below.
Finding the Right Business Loan
New ventures may need a cash injection to start operating while seasoned companies may require a loan to build a new office. Lenders offer different loan types for different situations, and they may not provide desirable terms if you can’t currently prove business success. From unsecured loans to line-of-credits to unconventional business loans, these are the most popular loans for small and medium-sized businesses.
Line of credit
It’s useful for all business with a variable monthly income to have a line-of-credit, just for when times become tough. You’ll agree on a limit with your bank, and you’ll be able to access the money as and when required. Line of credits often have a low interest rate because they’re considered low-risk, and you’ll usually return the money promptly. Interest starts to accumulate as soon as you spend money from your line of credit and stops the second you pay it back. You probably won’t open a new location or revamp your office with a line of credit, but it’s useful for if you need money quickly to seize an investment opportunity just before you receive your next paycheck.
If you’ve just started your business and need a sizeable cash injection, you may have no choice but to obtain a secured loan. While interest rates can be favorable, these loans are a little risky because you need to secure them against your assets, which could be your equipment, premises or vehicles. If you can’t afford to repay your loan, the loan provider will claim ownership of your assets to repay all or part of the loan. With a secured loan, you can usually repay the full amount early without paying a penalty, but the initial total cost of interest will be calculated based on the date you agree to repay the full loan amount. You’ll usually make periodic payments for a set number of years until you repay the loan in full. You can use a secured loan to make any purchases you desire.
Similar to a secured loan, an unsecured loan includes an interest rate and repayment plan agreement, though you don’t have to risk any of your assets as collateral. That means even if you can’t afford to meet payments, the lender can’t claim ownership of your assets. It’s not always possible for start-ups to obtain unsecured loans because they’re considered high risk, so lenders naturally want to feel confident a business will be successful should they invest their loan wisely. Additionally, interest rates are usually higher on unsecured loans than on secured loans because of the increased risk, but they’re often very flexible, and you might secure favorable terms if your business does well.
Which Loan is Best for Your Business?
You ought to compare loans from a range of providers to secure the best terms and type of loan. Each of the loans above serves different purposes, and many banks and high-street lenders offer them at competitive rates. If you’re running a new, small business, you should remember that interest rates will probably be higher than average, but you’ll soon see them decrease as your company gains stead. Line of credits are useful for most if not all businesses, secured loans can provide start-ups with the initial investment they need to get off the ground, and unsecured loans are perfect for those who don’t want to risk their assets. It’s always good to speak to a financial advisor to find out more about your loan options.