Choose Your Loan Company Carefully, Some Loans Are Risky

2015-03-07

Jeffrey Bumbales

When you are ready to launch or expand your small business, you may decide to contact a loan company for the funding you need. But what seems like a safe path to the cash needed, like obtaining a bank loan, may actually be hazardous to the life of your business.

Many business owners think that the only viable option in finding that necessary capital is through a small business loan. You may have heard these loans are difficult to obtain, but did you know that the treacherous ground does not end if that loan gets approved?

There are several funding options available, but a small business loan can carry more risks and have hidden costs that the others don’t have.

Hidden Hazards
  • Balloon Payments: According to businessnewsdaily.com, small business bank loans typically have shorter repayment periods than other types of loans and that sets you up for a larger monthly payment. If your payment is reasonable, it is often because the loan includes a balloon payment at the end. This can cost you both time and money. Basically, if you don’t have the money to make that balloon payment, you are forced to refinance your loan and spread out the balloon payment over a few more years. With interest, this costs you more than you bargained for and keeps you tied down to making payments longer than you might have anticipated.
  • Fixed Payments: Say you agree to pay a certain amount each month on your small business loan, but your sales fluctuate. Many business owners find themselves unable to make a payment because there are natural slower periods in just about every business out there. Whether it is a seasonal decrease or simply a slower month of sales, your circumstances will not be considered as a factor in making your payments.
  • Losing Your Collateral: A small business loan may require some type of valuable property to be offered up as collateral to secure the loan. Borrowers may put up the property that houses their business or even their own home as collateral. If you hit a rough patch and can’t make your payments, you could lose your property.
  • Debt That Outlives Your Business: Since small business owners and those launching new businesses may have insufficient revenue or lack a lengthy credit history, more might be required of you to secure the loan. According to smallbusiness.chron.com, a guarantee is often required by commercial lenders. Essentially, the small business owner must pay the loan back from personal assets if the business is unable to make the loan payments. Personal assets mean your home or anything else of value that you personally own.

As you can see, a small business loan may seem pretty safe upon first glance, but it can actually be the down-fall of your business and even your personal finances.

Funding Options for Your Future

The good news is that a new market of lending solutions has evolved to meet the growing demands of the small business owner and today’s entrepreneur.

Alternative funding is a business savvy solution that is safer, offers flexibility, is easier to obtain and is faster than a small business loan at your bank. With alternative business funding, what once took anywhere from several weeks to a couple of months can now be achieved in two days by applying online.

Working Capital Loans

Working capital loans offer businesses of all sizes access to capital to expand their business, cover the costs of immediate needs, and finance unexpected opportunities. These short-term loans provide businesses with a lump sum of cash given upfront, which is then repaid, along with the interest rate, over a set time period of time.

The loan amounts are often smaller in size, and the repayment period is shorter. With working capital loans, businesses get fast access to money without any in-depth paperwork to fill out, and a good credit score isn’t necessary to qualify. Although interest rates for working capital loans can be higher than other financing methods, many businesses find that the speed and flexibility of these loans are worth the cost.

Lines of Credit

With a Business Line of Credit, the lender lets you borrow money up to a specified pre-approved amount. To qualify, alternative lenders will look at the health of your business and its potential for growth.

The borrower’s payments and interest charges are based on the exact amount of money they accessed, not the full amount available. So, if you are granted up to $10,000 and only borrow $7,000 your payment and interest charges are based upon that $7,000. Similar to credit cards, but with lower interest rates, lines of credit are typically unsecured, so they don’t require collateral or long repayment time-frames.

Equipment Loans and Leases

This option is confined to providing cash for purchasing or leasing equipment. It allows your business to spread payments out over time and the loans can be easier to obtain regardless of your credit score because the equipment itself serves as the collateral required for the loan. If you cannot keep up with payments, the loan company can seize your equipment, but there is less risk to your overall business and personal finances.

Angel Investors

Finding an investor to fund your business can be a challenge and you will be giving up a large chunk of future revenue with this avenue of funding. Investors typically look at your business and its potential and expect you to pay about 20 to 25 percent of your future profits as a return on their investment. The upside is they are an investor, so if there are slow periods or business challenges, your payment to them is reflected by the current health of your business, not governed by a fixed payment.

Conclusion

If you have considered a small business loan, but have worried about risks and the health of your business in the future, there are other business capital options available to help you succeed safely. Always look at the risks involved and consider which option best suits the needs of your business. Look to Credibly for quality small business funding solutions. Contact us for more information.