For businesses operating on a small scale that haven’t got high-value assets to their name, the thought of using their assets as collateral for a loan can be worrisome. You do not want to put your personal home on the line and your business has a limited number of assets, so what do you do when you need funds?
Fortunately, there are unsecure loan options so there’s no need to use your assets as security. If you have a reasonably good credit history and sound financial statements, you can find lenders who’d be willing to provide the funds you need.
Here are a 6 financing options if you are looking for funds without putting your assets at stake.
1. Unsecured Term Loans
Getting an unsecured loan from the bank is difficult, unless you have an excellent credit score and a track record of strong financial statements. There are many things that influence your credit score, with payment history and amounts owed being the major components.
If you are unable to obtain an unsecured loan from the bank, the chances of acquiring one from a private lender are a lot higher, as they tend to have fewer eligibility requirements and shorter processing time.
You have the choice of long-term loans (payable over 2-5 years) or short term loans (payable through weekly payments over a year usually). Small business loan rates on these loans may vary, depending on your credit score and business stability.
2. Invoice Factoring
For businesses with high credit sales, delay in payments by customers can cause serious cash flow problems. You deliver the goods or services and have to wait 30-60 days to receive payment.
Invoice factoring addresses this problem by allowing you to borrow money against your receivables. The lender advances up to 80% of the receivable amount, with the remaining paid after deducting their fee, once the customer clears their account.
3. Equipment Financing
If you need money to purchase assets, such as machinery, vehicles or office equipment, equipment financing is a viable option. You can borrow as much as the price of the equipment and repay it over a fixed period. If you fail to repay the amount, the asset itself is the only thing you lose, without any risk to your existing assets.
4. Merchant Cash Advance
Another financing option that doesn’t require collateral, merchant cash advance, involves selling the business’ future credit sales to a company in return for immediate funding. The lending company is then repaid by giving it a set proportion of the business’ daily credit sales. You are basically giving away a portion of your future sales in return for the loan.
Here, unlike interest payments on other loans, you don’t need to pay a high fixed amount even when business is slow – instead, the amount paid is directly proportional to your sales. However, it is an expensive financing option.
5. Line of Credit
Under this option, the bank approves a maximum limit on the amount you can borrow and you are allowed to withdraw funds whenever needed. Interest is only charged on the amount of borrowing – it is similar to a credit card.
Lines of credit are useful for the business’ short-term needs, such as paying suppliers, fulfilling a large order or dealing with cash shortages.
6. Business Credit Cards
For short-term funding, a business credit card is a sound option. One that comes with a zero introductory APRis particularly useful, as it allows you to get funds with no interest during a defined introductory period. The period offered on each card varies and can be as long as a year. However, once the regular APR is applied, it becomes a costly option, if not repaid quickly.
The Bottom Line
When applying for a loan, it is easy to be optimistic and ignore the consequences of defaulting on the loan. However, the risks associated with non-payment can be severe, so it is important to know what you are putting on the line and proceed with caution.