Loans are a lot less expensive when you can secure them using collateral. In fact, if you need a large influx of working capital for something like an asset purchase, secured loans can be the only option, because unsecured loans often have income ratio restrictions that make them inefficient for large-scale purchases. Luckily, there are a few options, so you can find something even if you aren’t buying an asset with the money.
Traditional business loans are primarily used for asset and property purchases, and sometimes for the acquisition of whole companies. It’s what they are designed for, and they are quite efficient for it. There are also loans you can secure by refinancing equipment you own outright. This gives you the same range of interest rates as loans for a new asset purchase, but the capital is flexible so you can put it where you need it. The drawback is that loans that use these assets tend to take some time to approve, so you need to plan for them.
Another option for collateral is your inventory. Since it flexes up and down, you will need to work with a lender that has experience adjusting credit to meet your inventory holding level. This can be a great way to access working capital with a loan that you can pay off easily when the inventory sells. It takes a specialized lender to make this kind of loan work, and it is often structured as a flexible credit account with a balance that can be drawn upon as needed.
Finally, you can secure your loans with your invoices if you have money that is owed to your business from work you’ve already completed or goods you’ve already delivered. Those invoices are considered assets for loans from factors and similar lenders, who then take over the payment collection process. That means your loan will not only have an asset securing it, the process will also streamline your administrative work and outsource an important part of your accounts process at no additional cost to you.
The right type of collateral depends on the situation and your business type. If the longer-term loan for a big investment is where you are at right now, it’s a great way to expand. If your needs are more short-term, then using either inventory or invoice financing will be the best choice. Inventory financing is there when you need it, with little advance notice, but it requires setup and regular management, so there is administrative overhead. Factoring is the opposite. Together, they can meet almost any short-term financing situation if your business fits their collateral model.