If you are a fledgling business or one looking at its next expansion phase, chances are you have considered taking a third party investment. There are several organizations which are offering you small business loans, both secured and unsecured. Let’s quickly understand the difference between the two.
A secured loan is where you put up a collateral, while in an unsecured one you take a loan based on the size of your business and its credit rating. Hold on, before you rush to get an unsecured loan; there are advantages and disadvantages to it. Though securing an unsecured SME loan is comparatively easier than a secured loan, your business does need to have sufficient positive credit history to qualify for the loan.
If you are considering applying for an unsecured SME loan, ask yourself these questions first.
- What is the amount that my business really needs?
Consider the exact amount of the SME loan that you wish to borrow. A higher interest rate means you will pay more. Borrow only as much as you need, and only as much as you can afford. Study the market and do your research thoroughly and find the best way to make the most of the borrowed funds.
- Does my business have the adequate cash flow to repay the loan?
Remember, you will have to continue making money while repaying the loan. Evaluate your cash flow before you take the loan. Will you be able to manage the monthly loan repayment in case of any slowdown in the business? With no collateral involved, the risks on defaulting are certainly lower than with a secured loan, but there is your reputation and credit rating to consider.
- What is the one major purpose or business objective that this loan will help fulfill?
Identify the ONE reason you are taking the unsecured loan for. Is diversification on the cards or do you wish to strengthen your position in the market? Is it for sales or marketing? Will this loan be utilized for your employees or your customers? Identify the purpose of the loan before applying. Funds will get used up and you will not see much change in your company’s growth. Unlike a secured loan, with an unsecured loan you get to decide how you use the capital – so choose wisely.
- Will the extra capital via the loan help my business grow or stabilize?
Identify what stage our business is in. Are you growing at a comfortable pace and need to up the ante a bit? Or are you growing too fast and need to use the funds to make sure the infrastructure and quality of employees can keep pace?
- If, for some unforeseen reasons, the loan cannot be repaid what will the repercussions be, for both, me and the business?
Like we’ve said before, an unsecured loan is less risky as compared to a secured one. For starters, you do not have to put up collateral and nor is your company at any risk of being taken over by the lender. However, in the event of a loan default, whether secured or unsecured, your credit rating and that of your business, will be affected.
Small business loans are important for a startup and are advantageous, but like with any business step, you should weigh out your options carefully before applying for one.