Unsecured startup loan
Question: I’m not sure whether to acquire an unsecured startup loan or a secured loan. I know there are benefits and drawbacks to both. I opened my restaurant almost two years ago, and have been showing a profit since my sixth month in business. I sold my house and put the proceeds into the restaurant. I’m nearly broke, but I have excellent personal and business credit scores. I rent my restaurant space and my house. I’d like to expand my menu, but I’ll need new kitchen equipment to do it. Is an unsecured startup loan best for me—I really don’t have anything for collateral—or should I apply for a startup loan?
Answer: You’re right about the plusses and minuses to an unsecured startup loan, but in your case, I think the benefits outweigh the drawbacks.
The upside:
• You rent your home and business space, so you have minimal debt.
• You have good personal and business credit.
• That you began showing positive revenue within so short a time bodes well for your ability to pay back an unsecured startup loan.
• Your loan amount will be relatively small.
• The lender will be happy to see you’ve invested your own assets into your restaurant. Lenders don’t want to invest their money into businesses when owners haven’t been confident enough to invest their own. The fact that you have made the investment will make getting an unsecured startup loan much easier for you.
The downside:
• You’ll probably have to pay a higher interest rate for an unsecured startup loan, though it will probably be lower than credit card rates.
• You don’t have any collateral to guarantee a secured loan, so your options are actually more limited than you think.
Don’t let the negatives scare you; your situation is exactly right for an unsecured startup loan. However, you should begin looking into a business line of credit next. You will need it to invest in inventory for special occasions when the restaurant will be especially busy. A business line of credit is also important to have on hand when you have unforeseen expenses, and in the restaurant business, that happens frequently!
Business line of credit
Question: I’m not sure if I need a business line of credit, a small business loan or a mortgage. I’ve bootstrapped my business for two years. I recently hired another employee and would like to hire two more, but I don’t have room in my current rented space. I’ve set aside enough money to buy and renovate a bigger building, but it’s hard to make payroll when I am waiting for payment. Should I take out a mortgage for another office? Should I take out a business loan or a business line of credit?
Answer:I recommend paying cash for the new space, and taking out a business line of credit.
A business line of credit a good way to cover smaller short-term expenses, like new electronics, furnishing and supplies—the sort of things you will need for a new space with more employees. A business line of credit will tide you over through the ebb and flow of A/P and A/R, and help you make payroll while you are waiting for payment. Payroll is one of the most common uses for a business line of credit.
If you can afford to move your business to a new level without going in debt, do it. Use the cash you have to invest in a new space because it is not a good idea to take on the increased overhead of a mortgage at the same time you are increasing personnel expenses.
Business lenders are not going to make an investment in your business if you have not already done so. Taking out a mortgage makes your new offices a debt instead of an asset you can use as collateral. Pay cash and lenders see you have made a huge investment and have little or no debt, and they will be happy to give you a business line of credit.
You will also be building your business credit score by staying within the limits of your line of credit and making regular payments. Moreover, you will have a higher credit line with better terms, and your next loan will be easier to acquire.
Business Line of Credit
Starting or running a business without a business line of credit is like jumping out of a plane without a parachute: it can be done, but seldom with the desired outcome.
A business line of credit is an invaluable asset during those inevitable brief periods when accounts payable can’t wait for assured accounts receivable. Other common uses for a business line of credit include covering unforeseen expenses or an investment in equipment, inventory or personnel required for a particularly lucrative project.
A business line of credit is usually obtained from a business bank, and requires only common sense criteria for approval:
• Does your business show a positive cash flow?
• Is there enough profit to make monthly payments on the credit line?
• Is the projected revenue and cash flow adequate to make the payments?
The same criteria that determine whether the business line of credit will be approved will determine the amount of the credit line, and repayment terms. Collateral isn’t usually required for a business line of credit, though an exception could be made for a business or individual with a low credit score, or inadequate cash flow or projected cash flow.
The interest rate and terms for a business line of credit is usually variable, allowing banks to adjust to changing market conditions. For instance, during a period of economic downturn a business’ line of credit may be decreased, the billing period shortened or the interest rates increased.
Business owners should do extensive comparative shopping before accepting any credit line. Let American Unsecured advise you on your suitability for different options and help you find the best solutions for your business needs. Since its founding in 1999, American Unsecured in one of the largest loan consulting firms in the United States and helped their clients get hundreds of millions of dollars to keep their businesses and the county strong. Let them help you too.