Entrepreneurs need to be incredibly persistent and intelligent in order to run their own business. However, even the best business owners will find themselves in a rut at some point, and sometimes the only thing that can move your business forward is more capital.
Trying to get a small business loan can seem like a daunting task. You have to go through the application process, provide a personal credit score, and most likely put up assets that can be liquidated (i.e. collateral).
Unsecured business loans (loans that do not require collateral) and business credit cards are becoming better options for many business owners, and you owe it to yourself and your business to consider all the options that are available to you. Camino Financial has a great post with all the details you need to know about these 2 options.
What are the Benefits of Unsecured Business Loans and Business Credit Cards?
In order to demonstrate the benefits and drawbacks of these two forms of financing, let’s consider a hypothetical case of Mr. Andre Iglesias.
Mr. Iglesias owns an online marketing agency and is looking to hire more marketing specialists to meet an ever-increasing client list. He needs the money fast and can’t afford to go through the lengthy process of applying for a bank loan.
He thinks an unsecured business loan could be what he needs and considers how it would benefit his business.
Not having to put up collateral means he can use those assets to improve his business instead. The shorter application process and faster funding time would also be really useful for lightening the workload of his current employees quicker.
He was also considering applying for a bigger loan down the road, so an unsecured loan might enable him to show the lender that he is responsible and open his business up for better terms in the future.
Mr. Iglesias was not unrealistic, however, and knew that an unsecured business loan would have its fair share of drawbacks.
He understood that he would be paying more over time due to higher interest rates that are standard for unsecured business loans. A lot of lenders also have prepayment penalties ensuring that you have to at least pay some of the interest rates over time, you can’t simply pay it back in a few months.
He also knew that his personal credit score would factor in, and the inquiry into his credit could hurt his personal credit score.
On the flip side, a business credit card had its own set of pros and cons.
A business credit card would allow him to spend money whenever he needed to and would allow him much more flexibility in terms of paying for inventory or other costs (which would free up more money to use on new hires).
He knew that many business credit cards offered rewards programs which could benefit him by gaining some capital back or getting access to resources that could help his business.
He also understood that using a business credit card would build his business credit and improve his chances of landing a bigger loan in the future.
Mr. Iglesias also had to consider the disadvantages of a business credit card. He knew that the interest rate on these cards was often very high which would cost his business in the long run.
He also knew that purchase protection is very slim on business credit cards and dealing with fraud or correcting an incorrect purchase would be a hassle. He was also aware that a credit card would bring in security risks if he were ever to lose the card or get it stolen.
Ultimately, Mr. Iglesias decided to take out an unsecured business loan due to the fact that he needed the funding fast and would be able to make a more personal connection with a lender.
It’s your turn
This is the type of thought process is the one you should use when you consider what financing option is more viable for you and your business.
What about you?
Is a business credit card or an unsecured loan right for you?