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From secured loans to unsecured loans, there are a number of financing options available in the market. Find out what they are and how they can help.
There are many reasons a business might seek financing by taking out a loan. The funds from a loan can propel a business towards greater success, such as when they are used for expansion purposes, to obtain equipment and machinery to raise production capability, and to improve cash flow so the business can improve its day-to-day operations.
While there are many other situations in which it would be prudent for a business to take out a loan, it is important to note that there are a wide variety of loans on the market. Businesses should evaluate the various loan options available to them in order to determine which would best serve their needs.
Financing options for businesses can be classified into two main categories—secured and unsecured loans. Here we discuss how they differ and how you can use them to improve your business.
Secured loans
While there are numerous types of secured loans on the market, one thing they have in common is that they all require the borrower to put up some kind of asset as collateral, a guarantee to the lender that the debt will be repaid.
This is similar to how a property is used to guarantee a mortgage when an individual takes out a home loan.
While collateral for secured business loans can come in the form of real estate owned by the business, other assets can be put up as well. One of the secured loan options available for businesses is the mortgage equity term loan.
Mortgage equity term loan
A mortgage equity term loan is similar to a second mortgage taken out while still servicing the initial property purchase loan.
While the first mortgage may not be fully redeemed, it can take advantage of the equity built-up in the secured asset while the loan is being repaid by taking out a business term loan and using this equity as collateral. Equity is built up when the value of the property increases over time from the date of purchase.
Taking this loan can be advantageous to the business as it allows companies to maximise their existing assets, using it to secure a loan at low interest rates that can be used for business’s working capital purposes. Another benefit of the mortgage equity term loan is that credit assessment tends to be quick and straightforward. Businesses therefore have a high chance of obtaining quick approval should they possess the necessary equity.
Mortgage equity term loans tend to be mid- to long-term loans, and interest rates tend to hover around 3 percent to 6 percent per annum.
Unsecured loans
Not all businesses already own assets that will allow them to qualify for a secured loan. For instance, early-stage start-ups and growing businesses are often unable to put up the collateral in order to obtain a secured loan.
Fortunately, there are unsecured loans available at relatively attractive interest rates, such as the SPRING working capital loan or unsecured business term loan, available through local banks such as UOB.
Another key advantage of taking out an unsecured loan is that there is no danger of having assets seized in the event that the loan cannot be repaid.
Unsecured loans are suitable for new and growing businesses who wish to raise funds in order to expand. They tend to be short-term loans of between 2 to 5 years, and interest rates are typically around 7 percent to 11 percent per annum.
How financing can help
Financing can help businesses in a variety of ways, including the following:
- Improving cash flow – Improved cash flow can enable businesses to operate more comfortably, enabling them to seize opportunities and raise their company profile.
- Improving day-to-day operations – The funds from a commercial loan can enable businesses to improve their everyday activities and business processes to boost productivity.
- Grow the business – Businesses can channel the funds from a loan into driving expansion.
- Purchasing inventory – One of the costliest business expenses is purchasing inventory. Taking out a loan to fund inventory purchases ensures a business can continue with its operations despite the big spending.
- Hiring budget – Taking out a loan can enable a business to raise or maintain its hiring budget in order to employ talented individuals.
Conclusion
There are loans open to all types of enterprises at every stage in the business lifecycle. Obtaining funding from banks can be a very effective way for a business to raise its profitability and drive growth.
Finally, it is important for businesses to consider the widest possible range of scenarios in which they can benefit from the use of their commercial loans in the future. Businesses should evaluate their needs as well as the assets they can afford to put up as collateral when determining which loan would best suit their needs.
This article was sponsored by UOB.
Disclaimer:
The views and opinions expressed in the article are those of the author’s and do not necessarily represent the position taken by PropertyGuru, UOB and their respective employees.
Information provided in this publication is general in nature and does not constitute professional financial advice. PropertyGuru will endeavour to update its publication and website as needed. However, information can change without notice, and we do not guarantee the accuracy of information in the publication or on the website, including information provided by third parties, at any particular time.
Whilst every effort has been made to ensure that the information provided is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner or your bank to take into account your particular financial situation and individual needs. PropertyGuru does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this publication or on its website. Except insofar as any liability under statute cannot be excluded, PropertyGuru and its employees do not accept any liability for any error or omission in this publication or on its website or for any resulting loss or damage suffered by the recipient or any other person.
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