Debt Financing
Unsecured and secured loans are both considered debt financing. It is common for small businesses to use debt financing in order to get their business started as most business owners do not have the funding available in their savings accounts and other accounts to start their business. Since it can be a high risk to lenders to offer money to small businesses, they require some type of security for the loan. Business credit is one type of security on a loan and can offer the lender and you a reduced risk. The other type of security and the one that is preferred is collateral. When you use collateral, you are agreeing to a secured loan. A secured loan generally has reduced interest rates and provides greater financing opportunities than an unsecured loan. Here are some other types of security lenders will accept for debt financing:
- Guarantee. When you sign a loan guarantee you are basically saying that you will personally guarantee the repayment of the loan. It's a good idea if you have the funds to cover it but it's not always the best idea out there. Having another person guarantee the loan is a better idea instead of using your personal finances and money to guarantee the loan.
- Endorsement. This is similar to a loan guarantee but the person endorsing the loan usually needs to provide some type of collateral for the loan.
- Equipment collateral. A great way to offer security on the loan is to use some of your existing equipment. If your equipment can fetch a fair price in the event that you do default on a loan, the lender will easily offer you the money without any problem.
- Accounts receivables. A lot of companies use their existing sales and cash flow numbers to secure a loan. If you have a lot money coming in, lenders will see you as a stable company and they will offer you the financing. Typically you need to guarantee a certain percentage of your receivables to the lender for the loan, which is usually around 60% or more.
- Real estate. Another great guarantee for a loan is the building or some type of real estate that you own. Lenders can easily offer you the financing if you have a nice piece of commercial or personal real estate.
- Securities. Lenders always look for stocks and bonds that a company owns. You can also use your personal investments for a loan to reduce the risk to the lender.
- Business savings account. If you have a decent amount of money saved up, you can use this to secure the loan. This is why it is so important to focus on building up cash reserves for your business.
- Insurance policy. If you have insurance, you can use it as collateral to secure up to 95% of the loan. It's a great option for businesses and there is literally no risk to you.
- Inventory. While you don't want to have too much inventory handing out on your shelves, you do need to have just enough to secure a loan.
Now that you know what type of collateral you can use for debt financing, lets talk about some of your loan options. You have short-term and long-term loans that come in the form of secured or unsecured. The amount of interest you pay is based on your credit rating and the risk you pose to the lender. Timely payments to previous lenders will dramatically reduce the interest payments on the loan. Of course collateral can also help to reduce the risk as well.
- Short-term loans must be repaid within 18 months
- Long-term loans last 5 years or longer
There are intermediate loans which are about 3 years long. Just make sure you have steady sales to support your cash flow so you can repay the debt in a timely manner.
Corporate Credit Concepts specializes in debt financing. For more information about debt financing and how it might benefit your business, please CLICK HERE for a free phone consultation.