By Scott Donnelly, Director of Board at CapitalBox
In the current climate, many businesses, especially small businesses, have found themselves in need of short-term loans to cover expenses such as higher-tax bills, maintenance, buying crucial equipment. At the same time, businesses that are flourishing in the short-term may now be focused on medium to long term investment such as remodeling, expanding, investing in inventorying, or hiring new employees.
To secure a loan, there are a few requirements to tick off the checklist. For those businesses that are just starting off, going to a bank might not be a viable option. Even if you meet the minimum requirements for getting a loan, you might be required to provide collateral for the bank business loan.
Collateral or a secured loan is to eliminate the lender’s risk. This is the reason so many banks prefer to only offer this type of loan, especially to young small businesses that are innately risky. Most banks require some liquid assets. The easier it is to turn the collateral into cash the higher the chance of getting business financing from a bank. Some of the most used collateral in banking these days are commercial real estate, business equipment, inventory, or supplies.
Most people think that a bank loan can be the cheapest available option for getting a business loan, but to qualify for a business loan can be quite difficult. The process of getting a clear answer can even take months. The collateral needed for this type of loan may also need to be audited, which only adds additional time and stress to your small business.
Bridge the finance gap with an alternative solution
Although business loans obtained by providing collateral are considered to have better conditions than unsecured business loans – it is still possible to find loans with similar terms. This is where alternative financing comes in.
Alternative finance at a time when your business needs it the most can be the difference between sinking and soaring. This is the main reason small businessowners are increasingly trying out alternatives, like silent factoring or business loans provided by private lenders or fintech.
Besides the straightforward application process, fast answer time and fast payment time, some of these alternatives rely mostly on personal guarantee. Meaning that if you take out a loan with a personal guarantee instead of a secured loan, you will be making a guarantee that you, as an individual, will pay the debt should the business default on the loan.
Understand how personal guarantee works
It is important to understand that a personal guarantee does not require any fixed assets — like your apartment or family valuables. You typically need to prove you have some sort of funds to show you’ll be able to pay off the loan, in case of default. No one takes out a business loan thinking they will not repay it, but the reality is that not all businesses succeed and not all debt gets paid back. Therefore, most private lenders that provide unsecured business loans require personal guarantees.
Another aspect to consider is the need to meet certain credit score criteria to get approved for a personal guarantee. Even if it isn’t much, some private lenders and fintech companies might ask for a list of all your assets and liabilities during the application process.
Is your business ready for financing?
One rule to keep in mind when taking out a loan: always have a plan for paying back the loan to fund your small business. Ask yourself why you want to take out that loan?
When looking for financing for your business you should be looking at what’s more important for you and your business at that stage. The cost of the loan will always be a factor but onboarding a new client, purchasing equipment that will help you grow your business, investing in marketing or getting new hires might be a smarter investment for your business, then waiting to get the lowest interest rate on the market. It’s your choice.
Finally, before agreeing to any sort of loan, remember to look at your business and your finances objectively – understand the risks and be cautious. But if you are confident in your business then taking out a loan could be a great step to secure its future.