Can you save your business life for the next 30 years? Can you prevent your business from falling into the 80% of businesses that are failing each year? How can you do that? There are many ways in which you can help your business not only survive but thrive as well. One of the ways you can do that is by knowing what types of business loans are available and the reasons for doing so.
What is Business Funding?
Business funding is a way of lending and borrowing money based on a financial agreement between the lender and the borrower. In exchange for having access to funds when applied for, the borrower promises to pay back with interest within a period of time back to the lender.
Sources of Business Funding
Traditional banks are the most popular ways to get a business loan, but they can also be obtained from credit unions and other commercial and private lenders.
Types of Funding
There are two basic types of loans, secured and unsecured.
Secured loans are backed by collateral such as property or equipment.
A secured business loan is a form of financing that facilitates the borrower with the money for his business. He or she can apply for this type of funding when the owner or the business has assets like property, stocks, bonds, inventory, machinery, equipment, and other valuable items pledged as collateral. That means that if for some reason the loan is not paid, then the lender can take away the pledged asset as agreed upon.
Example1: - ABC Capital company applies for a secured business loan and gets the funding approved because it has equity on an investment property it owns. ABC’s property equity is worth $500K and was offered up to 85% of the equity, this means the company has the choice to accept a secured loan of up to $425K or just the amount it needs for its business.
Example2: XXY Construction company won a construction project, but it is short on cash flow to procure raw materials for the project, luckily it has a fleet of heavy equipment it can use as collateral to obtain more funding. The lender provides a secured loan to fund the project against the company’s owned equipment as collateral.
Example3: XYZ Hardware Store is looking to expand into new untapped territory. It still needs more money to support the business expansion project, what helps the store, in this case, is that it has a large inventory and can use it as collateral to get the extra funding it needs. Naturally, the business owner applies for the secured loan gets funded, and moves on to execute his business expansion project.
Unsecured loans are not secured against any assets and therefore the risk of default is higher. An unsecured business loan is the form of financing that an individual or company can apply for without requiring collateral. The borrower must meet all qualifications set by the lender in order to be approved and receive the funds. The borrower must meet the lender's requirements to qualify for unsecured business loans. Requirements vary from lender to lender but generally speaking these requirements include the individual or company's credit score, financial history, and industry sector.
Example1: - ABC Capital company needs funding for their business operation, the lender requires a minimum credit rating score, a minimum monthly gross in revenue, and proof of financial history. ABC complies with all the requirements and gets the unsecured funding it needs.
Example2: XXY Construction company won a project, but it is short on cash flow to procure raw materials for the project. XXY has a strong financial history with its creditors, and maintains a good credit rating, in addition, it can comply with the lender’s requirements and is able to get the needed funding for the project.
Example3: XYZ Hardware Store is looking to expand into new untapped territory. It still needs more money to support the business expansion project. In this case, it does not have the required assets that would cover a secured business loan. Upon contacting her preferred lender, the business owner provides the required financial statements including bank statements to show proof of monthly revenue, and gets easily funded. Now the store can move on to expand into new territories and further grow the business.
Why would a business need a loan?
The above examples give an idea for reasons why a business needs funding, each business situation is unique, and there are hundreds of thousands of business situations that require the assistance of a financial consultant to determine the best type of business loan that best fits a particular business. In general, however, businesses need loans because it gives them access to more money than what the business can raise currently.
A business might need to borrow funds from an institution or another individual in order to grow the company, invest in new equipment, purchase inventory items that are needed for the production of goods or services, consolidate business debt, to cover unexpected business expenses, for business growth capabilities, or to expand the business into other areas which is another form a business growth.
The right lender or financial consultant has all the tools needed in order to provide the best secured or unsecured business loan requests for their clients and provide them with the funding when they need it the most and fast.
If you call or apply for a business loan with a certain lending firm, and the person on the other side of the phone line does not take the time to understand your business situation, then chances are that that person is just a loan broker trying to get a commission. And worst your credit information might be submitted to several other lenders that can affect your credit score. On the other hand, however, a reputable financial consultant will ask several questions about your business to get a clear picture to see what is the best funding solution that will allow you to access the funding you need with the best terms possible, especially if you are applying for an unsecured business loan.