The owners of an SME have several different options when it comes to funding expansion or just getting some additional working capital to avoid every month being so tight financially. Quite often, businesses are profitable but lack sufficient profitability to build up enough retained earnings to be comfortable. Getting some additional funds can make that daily issue far less strained.
Let’s look at some of the different funding options open to SMEs.
Secured Business Loans
A secured business loan is a way to get substantial funds based on pledged business assets. Each lender has a different criterion for what business assets qualify as collateral. With pledged assets, sometimes the loan is offered at a lower APR because an asset-backed loan is less risky for the lender when compared to an unsecured loan. This makes this type of loan attractive to business owners who don’t mind putting up assets as security.
There are various lenders for businesses that operate in different industries or that have unusual assets available as collateral.
Unsecured Business Loans
An unsecured business loan doesn’t require assets pledged to secure the funding. It is a useful option for newer businesses with few physical assets but sufficient free cash flow to repay the loan on a regular basis until it is cleared. Lending Express business loans offer competitive interest rates for unsecured loans, from a variety of lenders
Unsecured loan applications can be decided upon sometimes within just a few hours because credit checks are run, and details are verified quickly. There’s no need to prove ownership of assets pledged or get a valuation of them before approval of the loan. For SMEs needing quick money to plug a hole or expand rapidly, unsecured loans certainly have their place.
Line of Credit
A line of credit puts in place a facility whereby a business can draw down on lending funds up to an agreed amount. The business may pay for the facility and interest charges on the amount borrowed, however, it only pays towards the funds it chooses to borrow for the period the money is lent. In other words, instead of a business taking out a $10,000 business loan and paying fees and interest on the full amount over the lending period, the company can borrow $2,000 for two months, repay that plus interest and fees, and borrow $10,000 on another occasion and repay it three months later.
The result of using a line of credit instead of a loan is a more flexible lending arrangement. It tends to cost less when borrowing smaller amounts than a full business loan might have. However, financial managers within the business need to manage the funds carefully to make the best use of them; the structured repayment of a business loan with monthly or quarterly payments is preferred by some SME owners for its predictability.
Along with invoice factoring or loans from friends and family, a line of credit or either a secured or unsecured business loan provides plenty of lending choices for SMEs looking for funds. What’s most important is to choose the right lending option for the business at its current stage of development and to be clear about how the loan will eventually be repaid.