Secured business loans can be an important source of funding but they are not suitable for every business in every circumstance. If a business is struggling, throwing cash at the problem is not always the best solution. Once you factor in the added burden of actually repaying the loan, it could even make any existing problems worse.
The most crucial thing to do is analyse why you are struggling. If you are hampered by temporary cashflow problems an overdraft extension may be a better and more flexible solution. Your bank might not be forthcoming in agreeing to an overdraft or extending an existing one of course, especially if it is aware that there are problems.
If the underlying problem stems from slow or reluctant debtors, factoring may offer a workable solution. When you employ a factor, they take responsibility for chasing and processing your invoices. You have to pay them for doing so but you will be able to draw on funds as soon as an invoice is approved, freeing and speeding up cashflow and giving you access to funds that are otherwise tied up until the invoices are actually paid.
The Benefits of Secured Business Loans:
If you are looking to expand, need stock or have another valid reason for a lump sum or injection of cash, a secured business loan may well be the answer. You should, however, be sure that any such move would be genuinely beneficial, and that you’re not simply papering over deeper cracks with banknotes.
Don’t forget that almost all lenders will want to see your financial records before issuing a loan. If they see it as risky, they may offer punitive rates or require security in the form of company assets or even personal security such as a home.
If you do take out a business loan when you are struggling, you should factor the repayments into any business plan and forecasts. If you take an equal payments or equal principal payment arrangement, this is reasonably straightforward to plan for. As your regular payments will remain the same or decrease in size through the period of the loan.
If you take a loan with a ‘balloon payment’, this could be more problematic. You could make small repayments from the principal with a larger final balloon payment settling the balance at the end of the term. You could also take out a loan where you pay the interest only and pay back the full amount of the principal at the end of the term. In this case, you have to ensure that you are in a position to repay the sum at the end of the loan. If your business is already struggling, this can be a risky gamble to take.
If you do run into financial difficulty, recruiting the services of expert insolvency practitioners could make all the difference to turning around your struggling business.
- When You Need Fast Cash Now and Where to Find It
- When It Might Be Time for a Debt Management Plan
- The Advantages and Disadvantages of Unsecured Loans
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