Small Business Financing

When you need extra working capital, choosing the right type of small business loan or business line of credit is crucial. Business financing generally falls into two main categories: secured and unsecured. Each has its benefits and drawbacks, and the right choice depends on factors like your business’s financial health, business plan, credit history and the level of risk you are willing to take. Let’s explore the differences between secured and unsecured business loans, and how to determine which funding option is best for your business. What’s the difference between a secured and unsecured business loan? A secured business loan requires the borrower to provide collateral — an asset that the lender can seize if the loan is not repaid. Common types of collateral include real estate, equipment, inventory or accounts receivable. Because these loans are backed by assets, they generally come with lower interest rates and higher borrowing limits. An unsecured business loan, on the other hand, does not require collateral. Instead, lenders approve these loans based on the borrower’s creditworthiness and revenue history. Since unsecured loans increase the lender’s risk, they often come with higher interest rates and stricter qualification requirements. What is collateral? Collateral is an asset that a borrower pledges to a lender to secure a loan. It serves as a form of protection for the lender, ensuring that if the borrower defaults, the lender can recover the funds by seizing and selling the collateral. Collateral can take many forms, including: Real estate. Business owners can use owned personal or commercial property to secure a loan, giving lenders confidence that they can recover their funds if needed. Business equipment. Machinery, vehicles or other essential tools can be pledged as collateral, especially for businesses that rely on expensive assets. Some types of financing, such as equipment financing and some types of auto loans are structured this way. Inventory. Retailers and wholesalers can use inventory as collateral, allowing them to access funding based on the value of their stock. Accounts receivable. Businesses that invoice clients can use outstanding payments as collateral, ensuring lenders have a fallback option. Merchant cash advances may also provide upfront funding to businesses that pledge repayment via a percentage of their business’s credit card sales. Cash deposits or investments. Savings, investment accounts or certificates of deposit (CDs) can serve as collateral, providing a liquid asset that lenders can easily claim if necessary. The value of the collateral must typically match or exceed the loan amount to be considered acceptable by lenders. What are the pros and cons of a secured business loan? Pros of a Secured Business Loan Lower interest rates. Since secured financing options pose less risk to lenders, they typically come with lower interest rates. Higher loan amounts. Businesses can borrow a larger amount of money because the loan is backed by valuable assets. Longer repayment terms. Secured loan terms often have more extended repayment periods, making monthly payments more manageable than unsecured loans with shorter repayment periods. Broader eligibility. Businesses with weaker credit histories and lower credit scores may still qualify if they have valuable collateral. Cons of a Secured Business Loan Risk of losing collateral. If a business defaults on the loan, the lender can seize and sell the pledged assets. Longer approval process. The lender must assess the value of the collateral, which can slow down the approval time. Potential for over-borrowing. Since businesses can borrow more money with collateral, they may take on excessive debt that becomes difficult to manage. What are the pros and cons of an unsecured business loan? Pros of an Unsecured Business Loan No risk to assets. Since no collateral is required, entrepreneurs do not risk losing valuable assets if they default. Faster approval process. Without the need to evaluate collateral, the loan application process and funding times are generally quicker. More flexibility. Unsecured loans can be used for various business needs, from expansion to short-term cash flow gaps. Good for established businesses. Companies with strong financials and business credit history can often secure favorable terms. Cons of an Unsecured Business Loan Higher interest rates. Since the lender is taking on more risk, interest rates are typically higher. Lower loan amounts. Borrowing limits are often lower compared to secured loans, leading to approvals for smaller loan amounts. Strict qualification requirements. Businesses must demonstrate strong creditworthiness and steady revenue to qualify. Personal guarantees may be required. Lenders may require a personal guarantee from the small business owner, putting their personal assets at risk in case of default. Is a secured or unsecured loan right for my business? The choice between a secured and unsecured business loan depends on several factors: Your business’s financial health. If your business has strong financials and a solid credit history, you may qualify for an unsecured loan with reasonable terms. If not, a secured loan may be the better option. Available assets. If you have valuable assets that you are comfortable using as collateral, a secured loan could provide better rates and terms. Loan amount needed. If you need a larger amount, a secured loan may be the better option since financial institutions are more willing to offer higher limits when collateral is involved. Urgency of funding. If you need funds quickly, an unsecured loan might be preferable due to its faster approval process. Risk tolerance. If you prefer to avoid the risk of losing business assets, an unsecured loan may be the safer choice, despite the higher interest rates. The Bottom Line Ultimately, the right type of financing depends on your business’s specific needs, financial situation and long-term goals. If your business requires a large sum and has assets to offer as collateral, a secured small business loan might be the ideal solution. Conversely, if you need quick access to funds without putting assets at risk, unsecured loan options could be the better choice. Carefully evaluating the advantages and potential risks of both options will help you make an informed decision that aligns with your business strategy and long-term growth objectives. DISCLAIMER: This content is for informational purposes only. OnDeck and its affiliates do not provide financial, legal, tax or accounting advice.

Business term loans are one of the most popular ways to secure funding for your business. Whether you’re looking to expand, purchase new equipment, or simply cover cash flow gaps, term loans can provide the financial flexibility you need. But how do they work, and are they the right choice for your business? Let us guide you through business term loans: benefits, drawbacks, alternatives and what’s required to qualify. What is a business term loan? A business term loan provides you with a lump sum of money that you repay over a fixed period of time, or “term.” Your scheduled payments are typically monthly or weekly and include a portion of the loan principal, interest and any fees the lender charges. Term loans are often used for long-term investments, such as growing operations, acquiring equipment, or purchasing real estate. Because this type of business financing usually comes with a fixed interest rate, term loans offer predictable repayment schedules, making financial planning easier for small business owners. Lenders that offer term loans include traditional banks, credit unions, and online lenders. How does a business term loan work? Here’s how a business term loan typically works. Applying for a business term loan. The loan application process for a business term loan typically starts with a pre-qualification step to determine your eligibility. Lenders determine your eligibility based on factors like time in business, annual revenue and your personal or business credit score. Next, you’ll need to provide key documents — such as financial statements, bank statements, tax returns and business plans — to support your application. Most loan applications also ask you to provide business checking account information. Once all necessary information is submitted, the lender reviews your information and provides a decision. This process is called underwriting. Borrowing and repayment terms. If you’re approved for a business term loan, you’ll be presented with a contract, or loan agreement. You may be charged an origination fee, which is a fee to cover the loan processing costs. By signing your contract, you agree to pay back the loan over a repayment period. After you sign, you’ll receive an upfront lump sum of money from your lender. Making payments. With a business term loan, you’ll make consistent monthly payments according to your agreed-upon repayment schedule. These fixed payments, typically referred to as installments, will apply toward the loan’s principal, interest and any fees. The pros and cons of a business term loan. Like any financing option, business term loans come with benefits and drawbacks. Understanding your loan options can help you decide if a term loan aligns with your business goals. Pros Cons When is it a good idea to take out a business term loan? Term loans are suitable for larger, one-time expenses and are less ideal for ongoing financing needs. A business term loan may be worth considering when you’re seeking a reliable source of funding for a defined, long-term goal. Here are some situations when it may be a good fit: If your expenses are ongoing or unpredictable, consider exploring a business line of credit instead of a term loan. What do I need to qualify for a business term loan? Different lenders have different requirements, but make sure you meet typical eligibility requirements before applying for a term loan. These may include: Time in business. Most lenders require at least 1-2 years of operational history. Some online lenders may accept companies with just 6 months of experience. Credit score. You’ll need credit history to borrow a business loan. For traditional bank loans, a personal credit score of 680+ is typically required. Some online lenders accept scores as low as 550, although you may pay for it in the form of higher interest rates. Annual revenue. Traditional lenders can require $100,000+ in revenue. Some online lenders accept businesses generating $50,000 annually. You’ll also need to prepare documents, such as: Keep financial records current, and consider consulting an accountant before applying for small business loans. What are some alternatives to business term loans? If a term loan doesn’t meet your small business needs, here are some alternatives: Business line of credit A business line of credit is a revolving credit line that allows you to draw funds as needed, up to a fixed limit. It functions similar to a credit card — you only pay interest on what you draw, and funds replenish as you pay back your balance. A business line of credit is best for flexible spending and managing short-term cash flow gaps. It also provides quick access to capital for emergencies or scaling. However, interest rates may vary, and credit lines often come with annual fees. Invoice factoring Invoice factoring involves selling unpaid invoices to a factoring company at a discount to receive immediate cash. It tends to work best for businesses with outstanding invoices seeking short-term liquidity. Although invoice factoring may work for businesses with less-than-perfect credit, high fees can add up over time, and the total payout from your invoices will be reduced. Merchant cash advance (MCA) A merchant cash advance is a lump sum advanced in exchange for a percentage of future credit card or debit sales. It can be a great fit for businesses with strong sales but limited access to traditional loans. There are no fixed monthly payments, because you repay based on sales. However, MCAs come with extremely high fees, and it may cause cash flow issues if sales slow. SBA loans SBA loans are term loans backed by the Small Business Administration, offering low interest rates and long terms. However, the approval process is lengthy, and there are strict qualification requirements. When considering term loan alternatives, weigh the costs and benefits of each option based on your business’s revenue, creditworthiness and immediate needs. The Bottom Line A business term loan can be a strategic tool for fueling growth, weathering financial hurdles or pursuing a major opportunity. However, it’s essential to assess your business needs, cash flow and repayment ability when deciding if it’s right for your small business. DISCLAIMER: This content is for informational purposes only. OnDeck and its affiliates