How To Finance Your Business: Part 1 – Loans

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Table of Contents

• Secured and Unsecured Loans
• Advantage of a Loan
• Disadvantage of a Loan
• Interest, Principal, or Both?
• Conclusion

Have you started a new business? Is your business growing but you need more money to support the growth? Do you want to hire new staff? Purchase more stock? Purchase new equipment? Perhaps take advantage of the new small business tax benefits for purchases costing up to $20,000, or perhaps you have a larger asset in mind.

We’re often asked for help with financing a business. We suggest five key mechanisms which include as follows:

1. loans;
2. grants;
3. convertible notes;
4. equity funding; and
5. crowdfunding.

This article is the first of a 5-part series on how to finance your business.

Secured and Unsecured Loans

A loan can be secured or unsecured.

A secured loan involves providing a form of collateral as an assurance that the loan will be repaid. This can include personal property, for example, your house, or business assets, such as business equipment.

For an unsecured loan, the lender has no security. The lender accepts your credit reputation as security. These types of loans often involve very high rates of interest and are usually short term. They are difficult to get unless you have a good relationship with the lender and have done business with them previously.

Advantage of a Loan

The key advantage of a loan is that, if you obtain a loan for your business, you are not required to give any equity in your company. There are many advantages to having only one shareholder, or limiting the number to a small group. This will help you to retain control of your business. It means that you do not have investors imposing on the running of your company. It also means that if you go to sell the business, the purchaser only needs to negotiate with one (or a small number) of shareholders.

Disadvantage of a Loan

One key disadvantage of a loan is that obtaining a loan for a new business can be difficult, especially when you are just starting out and have little or no revenue and few or no assets. New and smaller businesses struggle to obtain a loan unless they are providing security, often their own home or other assets. This means that these assets are at risk. Another key disadvantage is the need to pay interest at regular intervals, e.g. each month.

Interest, Principal, or Both?

You need to make sure you will have sufficient cash flow in the business to continue making the repayments on the loan. These may be weekly, fortnightly or monthly payments. These may be interest only, or interest plus principal. With a secured loan, the lender has the right to seize any property or assets you offer as security if you can’t repay the loan on time. This is a material risk to consider.

Is a loan right for you? It may be the only option that you have, for example, many small businesses start with putting expenses on credit card, which is a form of unsecured loan. Other business owners obtain a loan against their house.

Conclusion

The terms of the loan are crucial. Please seek legal advice to make sure that you understand the terms, including (i) interest rate payable if you default on the loan, particularly for an unsecured loan, and (ii) when the lender can sell your secured assets, for a secured loan. LegalVision can help create or review your loan agreement, so you fully understand the terms.

Can LegalVision help you with your loan? LegalVision provides businesses and individuals with tailored online legal advice, including drafting legal agreements like loans. We have experienced business lawyers who will help protect you. Call LegalVision on 1300 544 755.