From Debt Into Retirement

There are many ways to finance your business. Loans, government grants and private investment are all options open to most small business owners. Being aware of and understanding your options will bode well for the future of your business and career. Government grants, loans and private investment all have different prerequisites in place to determine borrower eligibility. A small business owner may not be eligible for a government grant due to his or her circumstances, but may be entitled to obtain a small business loan. The owner then has to decide between secured and unsecured bank loans, line or credit, factoring and so on. It is easy securing finance for your company; however, the difficulty lies in gaining enough understanding to obtain the correct type and configuration of loan for your circumstances. Lending companies use their own financial language and try to communicate to clients with what seems to be a new form of English. Do not be discouraged by your lack of understanding and dazzled by the colorful jargon – it is easier to comprehend than you think. In the following paragraphs are descriptions of the three most relevant loans pertaining to the small business owner. The most important are: short-term bank loans (unsecured and secured) and a small business line of credit.

Borrowers can apply for what is called a “short term” or “long term” loan. A short-term loan spans less than a year; a long-term loan can last for many years. A mortgage is a long-term loan and a personal overdraft is a short-term loan. Another type of short-term loan is a line of credit. However, a line of credit can be either secured or unsecured, so it would be prudent to describe the latter type of loan first. Secured loans are sometimes called “collateral” loans. The main difference between a secured and unsecured loan is, when a borrower applies for a secured loan he or she offers up collateral to the lending company. If the borrower is unable to pay the loan, often referred to as a “default”, the lending firm has the legal right to claim the collateral as compensation. Collateral usually takes the form of a building or property. Land can be used as collateral as well as smaller objects, jewelry for example, that are of sufficient value. If the borrower defaults, the bank will “seize” the assets being used as collateral and then sell them. If the sale of collateral results in any surplus money, the borrower has a right to the excess. Clearly, offering your home up for collateral in application for a loan should only be considered if you know exactly what you are doing and your business plan is watertight.

An unsecured loan does not require the borrower to offer up collateral. In essence, the bank has no “safety net” in the off chance of a borrower default. This is why bank unsecured loans require an excellent credit history and borrowing past. The lending firm or bank will not risk throwing its money at a high-risk client. A line of credit is very much like a personal overdraft for the business. This type of loan’s limit is set up in advance and does not require any communication with the lending company prior to withdrawal. This “overdraft’s” limit is dependent on the risk of the client, estimated revenue of the business and, in the case of a secured line of credit, the value of the assets offered up as collateral. This type of loan is excellent for supplying the business with a monetary buffer allowing the company to operate less restrictedly during day to day business. Whatever type of financing you settle on be sure to read and understand all the terms and conditions before diving in.