The Business Solutions Consultants
Starting a small business is exhilarating! You've got the vision, the drive, and maybe even a bit of savings tucked away to get things rolling. The temptation to use those savings is strong – it feels clean, straightforward, and avoids the hassle of loans, right? While dipping into your personal funds might seem like the easiest path, opting for a small business loan can actually be a far more strategic and beneficial move in the long run.
Let's break down why:
1. Preserve Your Personal Safety Net: Your savings are more than just money; they represent security. They're your emergency fund, your future down payment, your children's education fund. Plunging your personal savings into a business venture puts that crucial safety net at risk. If the business faces unexpected challenges (and let's be honest, most do!), you could be left financially vulnerable both personally and professionally. A loan allows you to fund your business without jeopardizing your personal financial stability.
2. Unlock Greater Growth Potential: Often, personal savings have limits. A small business loan, on the other hand, can provide a significantly larger injection of capital. This allows you to scale faster, invest in better equipment, hire more talent, ramp up marketing efforts, or secure larger inventory – all things that can accelerate growth and ultimately lead to greater profitability. Trying to bootstrap a business solely on savings can limit your scope and slow down your trajectory.
3. Build Business Credit – A Long-Term Asset: Using personal savings does nothing to establish your business's creditworthiness. Taking out and responsibly managing a small business loan is a powerful way to build business credit. A strong business credit history is invaluable down the line. It will make it easier to:
Secure larger loans in the future for expansion.
Negotiate better terms with suppliers and vendors.
Obtain favorable insurance rates.
Potentially even lease equipment or office space on better terms.
Building business credit is an investment in your company's future financial health.
4. Potential Tax Advantages: Interest paid on business loans is often tax-deductible, reducing your overall tax burden. While using savings might seem cheaper upfront (no interest payments!), the tax benefits of a loan can offset some of the cost and make it a more financially savvy move. Consult with a tax advisor to understand the specific deductions available to you.
5. Disciplined Financial Management: Taking out a loan requires a structured repayment plan and forces you to budget and manage your cash flow effectively. This discipline can be incredibly beneficial for a new business. Knowing you have loan obligations encourages careful financial planning and prevents impulsive spending, leading to a more sustainable business model.
In short, while the allure of using your own savings is understandable, a small business loan can be a far more strategic and beneficial tool for funding your venture. It allows you to preserve your personal financial security, unlock greater growth potential, build crucial business credit, and potentially even gain tax advantages. Think of a loan not as a burden, but as an investment in your business's future and your own long-term financial well-being. It's about using smart money to build a successful and sustainable business without putting your personal financial foundation at risk.
The Pros and Cons of Unsecured Personal Loans:
Unsecured Personal loans can be a useful financial tool when you need to borrow money. However, like any type of loan or credit, it's important to understand the advantages and disadvantages before taking one out. Here's a look at some of the key pros and cons of personal loans:
Pros:
1. You can use them for almost any purpose - Unsecured Personal loans are flexible and can be used to pay for things like medical bills, home renovations, weddings, vacations, debt consolidation, and more.
2. Funds are provided quickly - Unlike mortgage or auto loans for specific purchases, the funds from an unsecured personal loan are usually deposited directly into your bank account within hours after approval.
3. Fixed interest rates - Most unsecured personal loans have fixed interest rates, which means your monthly payment will remain the same over the life of the loan, helping you budget.
4. Unsecured Personal loans typically mean that no collateral is required. This protects assets like your home or car from repossession if you default.
5. Potentially build credit - Making on-time payments on an unsecured personal loan can help build your credit score and credit history.
Cons:
1. Interest rates can be high: Short-term personal loans tend to have higher interest rates compared to secured loan options like mortgages or auto loans, especially for those with lower credit scores.
2. Fees: Many lenders charge origination fees and other upfront costs, which increase the overall cost of the loan.
3. Shorter terms: Personal loan terms are relatively short, usually between 1-7 years. This means higher monthly payments compared to longer-term loans like mortgages.
4. Credit score impact: When you first take out the loan, it could temporarily lower your credit score due to a hard inquiry from the lender. Missing payments will also hurt your score. Always check to make sure that a "Soft Credit Pull" is done by the lender when you get pre-qualified. That way the impact risk on your credit is minimalized.
5. Risk of overborrowing: Since the loan uses are flexible, there's a risk of borrowing more than you need or can comfortably repay. Consider the possible use of a Line of Credit. You only pay on what you actually use.
Funding Your Startup Dream: Business Loans vs Venture Capital
Starting a business requires capital, and entrepreneurs have two main funding options - business loans or venture capital. But which one is right for your startup? Here's a look at the key differences:
Business Startup Loans
A business startup loan is a type of debt financing from a bank, credit union, online lender or the Small Business Administration. With this route, you borrow money and repay it over a fixed term with interest.
Pros of Startup Loans:
- You retain full ownership and control of your business
- Fixed payments make it easier to plan cash flow
- Builds business credit history
- More flexibility in how you use funds
Cons of Startup Loans:
- Difficult for brand new businesses to qualify
- Personal guarantees and collateral often required
- Debt burden with interest costs
Venture Capital Funding
Venture capital is equity financing in which investors (venture capitalists) provide capital in exchange for an ownership stake and a percentage of future profits.
Pros of Venture Capital:
- Large influx of capital without taking on debt
- Valuable expertise, mentorship and connections
- Resources to support rapid growth
Cons of Venture Capital:
- You give up a percentage of ownership and control
- Intensive vetting and stringent deal terms
- Very high growth expectations to provide ROI for investors
Which Option is Right for Your Startup?
The optimal funding path depends on several factors like your business stage, scalability, risk tolerance and long-term vision.
Startup loans may be a better fit for smaller, lifestyle businesses with limited growth potential where the owner wants to maintain full autonomy.
Venture capital is geared more towards innovative, high-growth startups with the ability to achieve a very large valuation and willing to sacrifice some ownership for growth resources.
It's wise to explore both funding avenues and tap into free startup resources as you determine the best financing strategy aligned with your goals. Professional advice from an accountant, lawyer or business advisor can provide invaluable guidance.
No matter which route you take, securing sufficient startup capital is a make-or-break factor. Carefully weighing the pros and cons of startup loans versus VC funding is crucial before deciding how to fuel your entrepreneurial journey.
***The loan venders that we work with do not provide Venture Capital Loans.
How to best use a Business Working Capital/Cash Advance Loan
Let's imagine you own an automotive body shop or repair shop. A customer brings in their car after a minor accident. They were backing out of a parking space and bumped into a steel post, like one that protects a fire hydrant.
The damage is to the right front fender, the bumper cover, and possibly some suspension issues. You estimate the repair cost to be around $8,500. Fortunately, the customer has insurance that will cover the repair, minus their $1,000 deductible.
However, the insurance company is one of those that pays out 30 days after the repair work is completed. As a smart business owner, you understand the importance of cash flow. You don't want to drain your business bank account to cover these upfront costs. You need that money to pay for essential expenses like rent, utilities, and employee salaries.
Instead of using your own business funds, a savvy shop owner will utilize OPM – Other People's Money. This means using a working capital or cash advance loan to purchase the necessary parts, paint, and materials to fix the customer's car.
The cost of this working capital or cash advance isn't absorbed by the business. Instead, it's factored into the total repair cost that the customer (and ultimately the insurance company) will pay. This way, the working capital loan effectively becomes "free money" for your business, as it's covered by the repair income.
Let’s consider another scenario. You run a small auto repair shop, and a good customer has their car towed in. The engine is making a strange knocking sound, especially when accelerating from a stop. You suspect it's a serious issue like damaged rod bearings.
After diagnosis, your mechanic confirms the engine is beyond repair. You present the customer with options: potentially rebuilding the engine (with no guarantees) or installing a new "long block" engine. The customer chooses the new engine, which will cost $7,800.
This engine replacement is needed near the end of the month. You have money in your business account, but it's earmarked for upcoming employee payroll, utility bills, and rent – all due within days. Can you comfortably spend $7,800 on an engine right now without impacting your essential business operations?
Again, the smart business owner turns to OPM. They secure a cash advance to purchase the new engine. Just like in the first example, the cost of this cash advance is calculated into the customer's final repair bill.
In both cases, by strategically using a working capital cash advance and incorporating its cost into the customer's bill, the business owner avoids using their own precious business capital and ensures smooth operations. This is what it means to work smart – using financial tools to your advantage and protecting your business's financial health.
Where Does The Money Come From?
Money can come from a pool of private investors. Other times the money can be obtained from a Hedge Fund. Insurance companies will make money available for use by business owners. And guess what, even banks will take money from accounts to use for investments. Yes, the money that you deposit into your bank account could be used to fund a business.
What can the money be used for?
Many people think that when you get an unsecured business cash advance that it has to be used just for the business. That's far from the truth. The money your business gets advanced can be used for anything. I've seen people use it to buy a new car. One family used the money that they got for a down payment on buying a house. Another used some of the money to go on a trip. That person hadn't had a vacation in 20 years.
Interest Rate vs. Factor Rate. What is the difference?
I get asked a lot about what is the interest rate that the lender we work with charges. That's were I go into the difference between the "interest rate and factor rate". In short, this is the difference. A traditional loan typically has an interest rate. So if a loan has an interest rate of 14%, you are paying 14% whether the balance on the loan is $50,000 or $11,000. On a "factor rate", you are paying a flat rate for "use of the money". There's no compounded interest involved.
Banks Make It Hard For Businesses To Get Money
Yes, banks like to lend money, but they make it so hard that the majority of businesses do not even qualify. Why is that? Well, it's called "the risk factor". If your business is doing well and doesn't need money, the risk of your business defaulting on a loan is very low. They may even throw in other things like personal guarantee's and UCC-1 filings to secure their position and money. With an unsecured business cash advance, yes risk is looked at, but the amount of money that your business will be advanced is in a way that it does not put the business at risk of defaulting. Your business may get an initial smaller cash advance at first, but what's nice is that you will already be in the system and can easily get increases once the business has paid down 60% of the initial cash advance.
Non-QM Mortgages Explained: The Flexible Path to Homeownership When Traditional Loans Don’t Fit
When it comes to buying a home, not everyone fits into the traditional mortgage box. Whether you’re self-employed, have a unique income situation, or experienced a past financial hiccup, qualifying for a conventional loan can feel like an uphill battle. That’s where Non-QM mortgages come in—a flexible alternative designed to help more people achieve their dream of homeownership.
What Are Non-QM Mortgages?
Non-QM stands for Non-Qualified Mortgage. These loans don’t meet the strict criteria set by government-sponsored entities like Fannie Mae and Freddie Mac, but they’re fully legal and legitimate. Instead of relying on the standard “one-size-fits-all” approach, Non-QM lenders look at your financial situation holistically, offering more flexibility for borrowers who don’t fit the traditional mold.
Self-Employed Individuals: If you’re a freelancer, business owner, or gig worker, proving your income with tax returns can be tricky. Non-QM lenders may use bank statements or other documentation to verify your earnings.
Investors or Real Estate Professionals: If you own multiple properties or have irregular income, Non-QM loans can provide the flexibility you need.
Borrowers with Unique Credit Histories: Past financial challenges, like a bankruptcy or foreclosure, don’t automatically disqualify you from a Non-QM loan.
High-Net-Worth Individuals: If you have significant assets but less traditional income, Non-QM loans can help you leverage your wealth to secure financing.
Non-QM loans are tailored to your unique financial situation. Here’s how they differ from traditional mortgages:
Income Verification: Instead of relying solely on W-2s or tax returns, lenders may accept bank statements, asset depletion, or even future rental income.
Credit Flexibility: While credit requirements vary, some Non-QM lenders are more lenient with credit scores or past credit events.
Loan Terms: Non-QM loans often come with adjustable or fixed rates, and terms can range from 5 to 30 years.
Non-QM loans aren’t for everyone—they often come with slightly higher interest rates and fees to account for the increased risk to lenders. However, if you’ve been turned down for a traditional mortgage or feel boxed in by rigid guidelines, a Non-QM loan could be the key to unlocking your homeownership dreams.
Non-QM mortgages are a powerful tool for borrowers who don’t fit the conventional mold. By offering flexibility and personalized solutions, they open the door to homeownership for a wider range of people. If you think a Non-QM loan might be right for you, reach out to a knowledgeable lender who can guide you through the process and help you find the best option for your needs.
Ready to explore your options? Let’s make your dream home a reality—no matter your financial story!