Unsecured Business Loans: When They Make Sense.
Cash is king. This expression, some say a favorite expression of self-made billionaire Alex Spanos, can not be understated nor can it likely be disputed by anyone that has ever been responsible for running a business. This blog is going to discuss the consequences of businesses having a lack of cash and in what circumstances using unsecured business loans can bring more revenue and profit to your business.
We know you are busy running a business if you don’t have the time (or patience) to read this blog but would like to learn more about unsecured business loans, click here.
Here is a quick and insightful exercise: Google “why do businesses fail?”.
From this Google search, an array of articles and ads will pop up, all explaining the top 5, 10, and so on reasons as to why most businesses do not last. Whether you select a Forbes.com article, or a likely NewYorkTimes.com article, or wsj.com, Investopedia.com, etc…. you will find a recurring theme (or cause) as to why businesses fail.
The recurring theme: due to insufficient cash flow (aka not enough cash in the bank).
Every business, no matter how well prepared, runs into “events” that require unforeseen cash expenditures.
The question this blog is here to help you answer is:
When does it make good business sense to take out unsecured business loans to deal with your needed business expenditures?
The first step in logically answering this question is to clearly identify the purpose of the loan and the revenue (or return on investment for the finance folks) the loan will bring to your business. Let’s face it, the purpose of a business is to generate revenue and eventually a profit. Every business decision should circle back around to these fundamental metrics (revenue & profit). If you haven’t identified the clear purpose and its potential ROI (return on investment) for the business loan, you are not ready to make a judgment call as to whether it makes good financial sense.
Something to know:
Unsecured business loans are typically viewed as “higher risk” lending from a lender’s standpoint. Why? Well, mainly there is no specific equipment or asset attached to the loan and…. and there is no restraint keeping the borrower from spending it on something that will not generate revenue and profit for your business.
In business lending, with higher perceived risk, comes a higher cost to the borrower (your business).
So back to our initial question. Knowing that unsecured business loans are typically costlier than, say, an equipment finance loan, when does it make sense to take a business loan out?
Typically, a business loan makes a lot of sense when there is an indisputable opportunity for your business to grow, become more efficient, or sustain itself with a quick cash injection (aka a business loan) where the value brought by the cash injection outlasts the loan itself.
After identifying the purpose of the loan and its potential ROI, this leads us into the second step. We need to identify when business loans are a good idea. The question to ask: Will the value brought by the loan outlast the loan itself?
If you can answer this with a “Yes!”, then it likely is a good business decision. Below are a couple of examples of when short-term business loans can bring value to your business:
First Example:
You are a retailer and you have an opportunity to purchase more inventory at a discount. The markup of that inventory allows for a significant profit. The profit from the inventory you purchased will be realized by your business the loan is paid off.
Second Example:
You are in the automotive repair industry and your most-used repair diagnostic tools are not working properly. Every day that this equipment is “broken”, will cost your business revenue. A quick cash injection would allow for you to repair the necessary equipment. This will likely bring revenue to your business for months/ years past when the loan is paid off.
The above two scenarios are great examples of when short-term unsecured business loans can help your business increase revenue and profit.
So…. long term benefits with short term costs is the simple answer as to when business loans make for a decision.
Sounds simple, right? Well, for many, it is not. This is one of the reasons why nearly 1/3rd of all small businesses will not make it their 2nd anniversary.
So….. when might unsecured short-term business loans not be the best choice? Well… First, when there are no long term benefits to the loan. Secondly, when purchasing new or used equipment. If you are looking to acquire equipment, most often, equipment financing or equipment leasing will be a better (less costly) option for you…. due to the following reasons:
1.) The equipment secures the loan or lease contract. This decreases the lender’s perceived risk. Less perceived risk = more savings for your business (aka lower finance charges).
2.) Longer-term approvals are available. This will allow you to spread the finance charges out over time — further helping your business cash flow.
3.) In some cases, with equipment leasing, you might be able to also benefit much more through tax savings than with an unsecured loan (always check with your tax accountant).
If you are interested in learning more about equipment financing, click HERE.
When you are trying to determine if an unsecured business loan is a right answer for your business’s cash flow needs, you are not alone. TopMark Funding has Business Funding Advisors ready to guide you towards the best financial decision. We are passionate about helping your business grow through smarter financial decisions.
