At some point down the line, your business will likely require more money. You might be looking to expand or simply trying to enhance a part of your operations. Either way, your business will need an injection of cash sooner or later. There are different paths available to you if your business needs some money. You could try to find an investor or business partner. Or you could look to reinvest the profits of the business. You could also get business loans. Business loans are ubiquitous in the business environment and provide a strategic way to raise money.
An important comparative advantage business loans have over alternative options is autonomy. Generally, borrowers will not interfere with how you run your business. This is unlike business partners or investors who would want to have a say in how you operate your business. The concern of the borrower is that you repay the loan. This allows you to retain the autonomy you need to operate your business effectively.
Other advantages of business loans depend on whether they are secured or unsecured loans.
Secured loans are loans that are backed up with some form of collateral. This is something you have pledged as security for repayment of the loan. If you cannot repay your loan, you may lose the collateral. As you would expect, this makes the loans structurally riskier than unsecured loans because you physically have something to lose. However, depending on the circumstances of your business, secured loans may benefit your loans in the following ways.
Higher borrowing limits
In many cases, a secured loan creates a situation in which you can access significantly more capital. This is because the idea behind a secured loan is that the asset the borrower is putting up as collateral is something of value. This implies that the person will work hard to avoid losing valuable property. Lenders are therefore more likely to loan larger sums of money if there is valuable collateral backing up the loan. If your business requires a large sum of money, secured loans will benefit your business tremendously.
Longer repayment schedules
The period within which you will be required to repay a secured loan is usually longer. This is because the amount involved is usually larger. The law also seeks to protect your property from wanton forfeiture. This long period affords you the comfort of maximising the amount borrowed and its effect on your business. You can spread the payment over a longer period that is convenient for your business.
Lower interest rates
The interests you will pay on the amount borrowed is lower because the risks are lower. The flipside is on your default the lender will be entitled to certain remedies which might include the sale of your collateral. Lower interests benefit your business because it increases your profit margins.
An unsecured loan is a loan that a lender issues, supported only by your creditworthiness, rather than by any type of collateral. Your creditworthiness here refers to strong credit history, a reliable stream of income or any other metric as agreed upon. Unsecured loans are a bit harder to get because the lender relies on your agreement rather than collateral assets associated with your business. The terms of the loan will also reflect this risk in the higher interest rates and stringent repayment terms. However, getting unsecured loans can be advantageous to your business in the following ways.
No risk to your property
With unsecured personal loans, you may not have to lose any of your properties or valuables if you can’t pay back the loan. This is perfect for you if your business does not have high-value assets or the assets are not available to be offered as collateral. You have the freedom to borrow money to assist with expansion and growth while maintaining peace of mind that your assets are not at risk. If your business is looking to embark on a capital-intensive project, you are also able to carry out the project safe in the knowledge that risk to your business property and assets is minimised.
Easy access and Quick Loan Approval
An unsecured loan can be obtained more quickly and with less hassle. You don’t have to send any documents proving ownership to the lender before applying and getting the loan. All you need to do is fill an application form, pay the fee, and wait for the loan proceeds to be transferred to your account. The lender checks your creditworthiness, financial condition, and other factors to decide whether you qualify for a loan.
Effective for small business expenses
Lenders will likely charge you a higher interest rate than they would for a collateralized loan. That increased interest rate is the price you pay for not having your house, your car or savings account on the line as collateral. With that in mind, you may want to consider going for an unsecured business loan when the purchases you need to fund are relatively small. That higher interest rate is less painful when it’s being applied to a smaller purchase, which means that it should be less painful to pay back.
Opportunity to increase your business credit scores
If you intend to keep sourcing for fund for your business from loans, unsecured loans allow you to increase your creditworthiness. Your credit score and your business’s credit score are both hugely important bits of data that tell lenders how likely you are to provide a positive return on their money. The way to achieve this is to always make sure you’re paying bills on time. Avoid opening too many lines of credit or credit cards. In the end, a higher credit score will mean lower interest rates, more generous repayment terms, or even more money.
Loans are a mainstay of the business landscape. They are advantageous but can be tricky. If you do wish to explore the world of no-collateral loans, be sure to understand what you are getting into. Find out if pursuing a secured or an unsecured loan is best for your business by calling a knowledgeable Illinois business litigation lawyer.