The success of your small business often depends upon its ability to raise money at short notice. A cash reserve or quick access to funds can lead to new opportunities and accelerate your company’s growth. How can you ensure that your business always has the liquidity that it needs? Many entrepreneurs turn to unsecured business loans and credit cards for their requirements.
These two sources of capital provide business owners with the cash in hand needed to meet the needs of growing customers. The available funds can also take care of any eventuality that may arise, or serve as a cushion in periods of low activity.
However, many business owners feel hesitant about taking unsecured business loans or credit cards because of the higher interest rates they can carry. In other words, they think it may not be a good idea to take on too much debt.
In this article we will address these two types of sources of cash buffer, detailing their pros and cons, so you can make an informed decision on which one better suits your business. But first thing first, what is cash buffer? Glad you asked.
What is Cash Buffer?
The report titled Cash is King: Flows, Balances, and Buffer Days, which analyzes the results of a survey conducted by JPMorgan Chase & Co., defines cash buffer as the number of days for which a business could sustain itself if its inflows were to stop. In other words, the number of days that a business has “ready money” to use for everyday operations and unexpected expenses; a cash cushion that provides some wiggle room for your business. The report, which used inputs collected from 597,000 American businesses, revealed some key results: 50% of small businesses hold a cash buffer that will last them less than a month.
The study found that:
⇨ 50% of small businesses had a sufficient cash buffer to last them for only 27 days.
⇨ 25% of businesses had money only for 13 days.
Do this numbers resonate with you? Even if you were not aware of the term “cash buffer”, you may recognize that your cash in hand isn’t sufficient at times of low activity; maybe more than once you haven’t been able to meet the demands of a client because your available funds were not enough to cover the expenses of the project. So let’s go back to your options: if your business needs money quickly, what can business credit cards and unsecured business loans do your you?
Business Credit Cards
Let’s go first with the option that seems to be most commonly used among small business owners. You can use a business credit card to quickly raise money for the various needs of your company. It can help you overcome your cash flow problems. It is a good way to raise short-term funds to meet your working capital requirements. The Small Business Credit Survey published in 2017 by the Federal Reserve Bank found that 31% of small business owners applied for a credit card to help them meet their cash needs.
Possibly, its greatest advantage is that it provides you with a revolving line of credit. You borrow precisely the sum that you need and no more. This feature ensures that the amount of money that you draw against your credit card, say, as a cash advance, is limited to your immediate requirement.
Read more on the pros of using a business credit card in our post Use a Credit Card to Capitalize your Business.
But the advantages that a credit card offers come at a high cost. Below you’ll find a detailed list of the disadvantages associated with a credit card:
- There are various charges involved; the interest or Annual Percentage Rate (APR) on the money that you borrow could be in the range of 12% to 22% or more.
- There could be a host of additional charges that you could be required to pay:
- Annual fee: this could range from about $100 to $500. Some cards waive this fee. You can also find cards that don’t charge you in the first year but impose an annual fee from the second year onwards.
- Cash advance fee: this usually ranges from 3% to 5% of the amount that you withdraw. Remember that you have to pay interest charges as well on the cash that you borrow. So, the total cost of a cash advance could be very high.
- Overlimit fee: if you exceed your credit limit, you could be liable for this charge.
- Another problem with credit cards is that utilization of the entire limit impacts your credit score. It is advisable to use only 30% of the available credit card limit. Any usage above this could lower your credit score. At times, the credit card issuer could even send an erroneous report to the credit agency regarding your card account. It’s a good idea to monitor your credit report closely and look out for any errors.
While it’s true that a credit card offers several benefits, you should use it with care. It’s good for raising emergency cash and for meeting those expenses that you can afford to pay off immediately upon receiving your billing statement. Using to borrow money on a regular basis can carry a very high cost.
Unsecured business loans
This may be the best option to provide you with the cash cushion your business may need. But what exactly are unsecured business loans? Unsecured business loans, as opposed to secured business loans, are those that don’t require the borrower to pledge collateral.
What exactly is collateral?
Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. What are the most common types of collateral you may be required to apply for a business loan?
Some of the most commonly offered and accepted types of collateral are real estate property such as homes. Real estate assets are often used as collateral because they are readily available. Other properties that can be used as collateral include boats, equipment, cars, and motorcycles.
- Other accounts
When you apply for a loan in a financial institution where your account is based, the lender can liquidate your existing account in default on a payment.
The items listed on an inventory can serve as collateral. Your lender can use and sell your inventory if you fail to repay your loan.
The cash flow for your business may be locked up in unpaid invoices, so these invoices on outstanding payments can also be used as collateral.
Now you know exactly what collateral is, but maybe you don’t have the collateral to put up. Small businesses don’t always own large assets such as a commercial real estate or a fleet of vehicles to pledge as a guarantee for the loan. More likely, they rent or lease large properties or assets instead of owning them. And even if you do have real estate or other assets that you can provide as collateral, you may not want to give these as security to the lender. The possibility that your own assets could be seized and sold to pay the lender is not an attractive one. Nobody can blame you for feeling that way.
Can I turn to a bank for unsecured business loans?
Let’s be clear: traditional banks aren’t usually a reliable source for a loan. Yes, the accepted practice for an entrepreneur looking for a small business loan is to turn to a bank. Unfortunately, it isn’t easy to get your loan application approved from these traditional lenders.
First of all, it’s important to understand that most traditional banks require collateral when you apply for a business loan. In other words, they prefer to provide secured loans. They want security in the form of stocks, bonds, certificates of deposit, or any other type of common collateral as seen above.
Besides the ability to provide collateral when you approach a traditional bank, you have to meet all their conditions. These may include:
- Good credit scores in the range of 660 or more.
- The ability to prove that you have sufficient cash flow to meet your loan repayments.
Another problem with banks is that they are slow. It can take weeks or even months to get a loan approved. Or even worse: it can never happen. In fact, the vast majority of small business loan applicants are turned down by banks. According to a recent report in the Washington Post, big banks approve only 25% of the loan applications that are made by small businesses. Ironically, that’s an all-time high.
So, what are my options for unsecured business loans?
As a small business owner, what can you do if you need a loan quickly and you don’t want to pledge collateral? One option is to approach an alternative lender. These financial institutions often have flexible norms, and it is possible to get a credit decision quickly. But expect to pay a higher rate of interest. An unsecured business loan is usually more expensive than most secured term loans. As we have explained, the lender is taking a greater risk in advancing money to you. If you don’t pay the loan back, there is no collateral for the bank to fall back upon. So they are forced to raise their interest rates.
For many small business owners, this APR is the most critical factor. They worry that they are paying an unnecessarily high rate of interest to the lender. While this fear may be justified, there are ways to determine if a business loan rate is fair. When you are evaluating a business loan, your primary consideration should be to understand whether the extra cash that you generate by using the loan amount is sufficient to repay the interest and principal on the sum that you have borrowed. Also, consider if the cost of the loan generates a positive return on the investment (also known as ROI). If you can not only repay comfortably the loan on a monthly basis but also generate some return, you should consider the loan.
Is this calculation still complex for you? Use a Business Loan Calculator to arrive at the repayment figure. You just need to enter the following information: your desired loan amount, the payment term of your choice (24, 36, 48, or 60 months) and the monthly interest rate ranging from 1% to 2.25%. After you have entered these details, hit the “calculate” button. The calculator will immediately tell you your monthly payment amount as well as your total interest cost.
Besides the interest, you also need to remember that you will have to meet the criteria that the financial institution of your choice lays down. Every lender has a different set of norms. One lender may insist that you should have at least $100,000 in annual revenue. Another lender may inquire about how long your company been in existence. A year in business may not be enough. A minimum of three years may be required.
The funds you obtain from the lender of your choice can help you market your product, raise production, or install new machinery: in any case, it should lead to higher revenue and increased profits. Regardless of your choice, as a rule of thumb, always remember: don’t spend the borrowed it in a manner that doesn’t help your business.
Meet Camino Financial
As we have seen, an unsecured business loan can be the best option if you don’t have any collateral to offer to your lender or if you just aren’t comfortable doing so.
If you decide to raise money through an unsecured business loan, a good place to start could be Camino Financial.
All that you need to do is to enter a few basic details on Camino Financial’s online form. You can generate an instant loan quote in minutes. Our team will review your details and suggest the most appropriate loan for your business.
The funds that you borrow can help your business grow and prosper. And in the case you can’t meet your repayment commitments, your personal assets like your mortgage or home won’t suffer the consequences. Since our loans do not require collateral, our annual interest rates range from 12.0% to 29.75%. In this sense, they tend to be similar to credit card rates. But our loans are a lot more beneficial than a credit card because you build your personal and business credit if you plan to pay down your outstanding balance over a long period of time.
Our unsecured small business loans are intended to help the small guys, or family businesses, offering from $5,000 to $400,000 in available funding.
Besides being unsecured, what are other key features of Camino Financial business loans?
- Instant pre-qualification with no impact on credit score
- Mobile friendly application with funding available in 2-10 days
- Repay at any time with no penalty or additional fee
- Few restrictions on the use of funds
- Loan terms from 24 to 60 months, paying monthly