Unsecured Business Loans
Is an unsecured business loan the right decision for your small business? Many small business owners go looking for loans when going through a financial crisis. Small business owners often make matters worse by agreeing to loans with high rates of interest and penalties. Before taking out an unsecured business loan it is important to understand if the loan will put an additional financial strain on your business. There is also the fact that an unsecured often require a personal guarantee. That means your personal assets may be a risk. Is an unsecured business loan necessarily a bad thing, absolutely not for many businesses it provides the capital needed to grow the business.
What is the Purpose of the Unsecured Business Loan
Business expansion- You have just signed a contract with a new customer that requires additional equipment and or staff. You know that the revenue to repay the unsecured business loan and turn a profit will be sufficient. This is the ideal scenario because of the contract you have reduced the risks that you will not be able to repay the loan.
Short-term cash flow problems- No one understands the importance of cash flow better than a small business owner. A small disruption sends tidal waves across our business. A cash infusion would solve this short-term problem. However, it is important to validate that the cash flow disruption is not part of a bigger issue. Unexpected maintenance repairs or an illness that temporarily disrupts the ability to deliver services or products are just a few examples. An unsecured business loan would get you pass the rough patch.
Problem meeting Payroll- This signifies serious problems in your business. A serious plan needs to be in place to examine the causes and rectify the problems. It is unlikely that an unsecured business loan is going to be a permanent solution. Will you need to cut back on staff to allow the business to resolve cash-flow issues going forward?
Ask the following questions before taking out a loan
- Will the loan provide a permanent solution or a temporary fix?
- What is the ability to repay the loan without a negative impact on operations?
- Is a personal guarantee required?
- What are the interest rate and terms of the business loan?
- Are there better loan terms available?
Other options to consider
- Bringing on an investor/partner who can infuse cash
- Personal line of credit
- Selling personal and or business assets
- Asking family or friends from a low/no interest loan
- A home equity line of credit
An unsecured business loan can be the right decision to move your business forward. Completing a proper evaluation of your personal and business finances is critical. An honest assessment can mean the difference between thriving and going out of business.
Jeffrey Elam is the owner of Jef Scott Small Business Solutions. He holds a degree in economics from Belmont Abbey College. He also worked as a loan analyst for Accenture Credit Services where he was a the top of his underwriting training class. As a loan analyst, he reviewed thousands of loan applications, many of whom were self-employed.
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