Last Updated on May 20, 2021 by MoneyVisual
Securing any type of investment or loan can be quite challenging, especially when you’re trying to secure funding or any other type of investment for a business, as many of them are denied when applying for certain loans through a bank. However, there are many third-party lenders that are willing to assist and they are giving many businesses a second chance to keep their businesses up and running smoothly.
Nonetheless, when you’re trying to secure a loan, you definitely need to understand all of the disadvantages and advantages that come along with it, no matter who you are borrowing from. You don’t want to get your company in a sticky situation that you may not recover from and your business ends up doing badly afterward. However, your business may benefit from business loans, debt restructuring, and certified appraisals if need be. But, let’s make sure that you make an informed decision whatever path you take. Here are 8 pros and cons of securing small business investments from a third party.
- You can protect your resources (Pro)
- Low rates (Pro)
- Growth (Pro)
- Advise and Expertise (Pro)
- Ownership (Con)
- Interest (Con)
- A lot of work (Con)
- Shorter terms (Con)
You Can Protect Your Resources
When securing loans from a third party, it allows your company to preserve or protect your resources. You can use whatever funds you have internally for another purpose in the company. The restructuring may be a good idea when trying to increase your business. Knowing what’s needed and the steps you need to take to get there will help. Draw up a new plan in order to see where money needs to be spent or where it can be saved. Protecting your resources not only helps the company, but it also helps to protect your employees too.
When securing a loan from a third party, their interest rates usually start as low as 5%. However, as a borrower, you must have good credit. Sometimes businesses get in situations where their credit may fall into a lower category by making late payments on business equipment and or office supplies. It’s very easy for that to happen but it’s harder to get back in good standing.
So try to keep your credit score fairly high if you can. It’s understandable that things can and do happen, so keep on top of all of your company bills. If you have fair or average credit, you may end up paying an interest rate of 15-20%, which is pretty high and will only defeat your purpose of having low payments and interest rates.
Securing a loan with a low-interest rate will make it more affordable to make your payments so that you are able to repay what you need to. Also, if you ever need to borrow again. You’ll be in good standing with whomever you borrowed from. High-interest rates will set you back and you’ll be in a worse situation than you started out with, not to mention, you’ll have a much harder time trying to borrow the next to go round if you need to. If you have good credit seek only lenders who have low-interest rates.
Many companies use third-party lenders so that the company can grow, which means they are now able to finance projects that they may not have been able to have they not used a small business loan. Growth for any company is important, especially if they want their business to continue to succeed. If a company has the possibility to grow, that means increased revenue, and increased revenue means it will be easier for the loan to be repaid.
Loans May Be Unsecured
Many third-party lenders have certain prerequisites when it comes to lending. Many need a personal warranty. And some may even place a lien on business assets to make sure the loan can be repaid. Unsecured loans allow you to get a loan without having any kind of prerequisites which is definitely a good thing. Many companies may not have what is needed for a secured loan or having a lien placed on their assets may not be an option.
Some third-party lenders may ask that you release a portion of your business in exchange for financing. While that seems extreme, you may very well get what you asked for. However, your new business partner may now be allowed to vote on company decisions and that might not be the best thing, especially if your vision isn’t the same. So be careful who you partner up with. It could mean the beginning of a great partnership or the end of your business.
If you’re already having financial issues, paying a large interest may set you back even further than you had intended, so you have to weigh out whether the interest you’re paying is worth it. If it’s not, I suggest you look elsewhere.
A Lot of Work
Securing funding can be a lot of work. You need to take your time, do your homework and research the companies you intend to solicit your proposal to. You’ll have a meeting after meeting with different prospects and that can be very overwhelming. Especially if you don’t find anyone where you both can agree on the terms. Find several lenders and narrow them down and see who matches your company’s needs best.
With some third party investors, your terms are shorter and you don’t have as long to pay back your investment. So, be careful when choosing your lender to make sure that the terms you agree to will help you and not hinder you. At the end of the day, you must do what’s right for your business to stay afloat. Continue to research the pros and the cons of securing a small business investment so that you can make the best decision possible for your company.