Determine Which Lending Type is Right for Your Business

When you are the owner of a small business there are many different hats that you will need to wear. You are the creator of the business, you are the public relations coordinator and many times the one who is completing the projects that are making your company money.

But one of the most difficult roles that you will have to fill is in the fundraising department. At some point, almost every small business is in need of additional funding.

It may be to expand or grow to fill a large order or sign a big contract, or it may be that you need the money to pay expenses during a lull in business. But whatever the reason, you will need to decide where to get the money and what you are willing to risk or pay for the use of it.

There are many sources for unsecured loans for business and you will need to find the one that is right for you and your business.

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An Investor

If you started your business as the sole owner then you have been used to having complete control over every aspect of the creation, launching, determining business practices and processes and every other aspect of decision making. But you have also been the only one to shoulder the responsibility for the business. You have experienced sleepless nights trying to sort out where the money will come from to pay employees, meet your outstanding bills and purchase materials to keep operating. If you decide to seek funding from an investor then you need to be prepared to be forced to consult with someone else before making all of the decisions. You also need to get used to the idea of having to answer to someone for the choices that you have made in the past and will make in the future. Having an investor is in a way like taking on a partner. In some cases they are not active in the daily operation of the business but some investors do want to have some input and control in the operation of the business. They see this as a way to protect their investment. If you are considering raising fund from an investor, then be certain that you fully understand the terms of the agreement before you sign any documents.

SBA Loans

The Small Business Administration is not actually a lending institution. The loan that you would get would be coming from a bank but the bank is encouraged to lend these funds to small businesses because the government/SBA guarantees a percentage to the bank. The SBA is somewhat of a mediator between small businesses and banks and they also offer support to the small businesses in other ways. There are mentor programs, counselors and classes that are offered to assist small business owners with the financial aspect of running their business. All of these features make the businesses who work with the SBA more likely to be successful. The SBA loans are processed much like any other loan and you need to provide information to show your creditworthiness and your ability to repay the money that you are borrowing. Another benefit for small business owners is that these loans offer a lower interest rate than conventional loans.

Alternative Financing

There are an ever growing number of options that you can select from if you are willing to look outside the conventional banking and borrowing sector. Some of the products include cash advances, asset-based loans, peer to peer loans, crowd funding and AR financing. These options can be used for any phase of a business from the cash needed at startup to bridging a slow period or a small scale expansion. The loans are normally not as large as a bank loan would be but they do carry a higher interest rate and some also have rather hefty fees that you must pay. But many small business owners are willing to accept the terms because these loans are easier to obtain. In many cases the loan is not based on the borrower’s credit score or credit history. The loans are based on the current accounts receivable of the business, projected sales and the businesses ability to repay the loan. Being unsecured, there is more risk involved for the lender but they are willing to take that risk due to the potential payoff in the form of a very high interest rate.

An Example

Accounts receivable financing, or factoring as it is sometimes called, is a way to immediately get paid for work that you have done and billed a client for. Many businesses must offer clients a 30 day invoice cycle and factoring is a way for a small business to get paid more quickly. The business contracts with the lender who is in essence buying the invoice from the company. The client is now going to pay the amount of the invoice to the lender who has paid up to 50% of the invoice to the borrower as soon as the invoice is issued. Then the lender will normally pay the borrower another 20-30% of the invoice when the customer pays. The remaining 20-30% of the invoice balance goes to the lender as their payment for making the advance to the business. This may seem like a huge percentage to pay to borrow money but if you have no other options due to poor credit or no credit then this is a good opportunity. Many business owners who are facing the loss of their company or who could otherwise be forced to sell a portion of the company to a partner look at this as a way to sustain their sole ownership. Other owners use these types of loans to grow their business when they have an opportunity which will take their company to the next level. They are willing to give up as much as 30% for interest or fees to expand and grow the company rather than pass on the opportunity. There are many choices for unsecured loans for business, you just need to find the option that is best for you.

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