Could Taking Out a Second Business Loan Benefit Your Business?
While you may be overwhelmed at the thought of taking out a second loan for your business, there are situations in which it might be advantageous. Whether you need funding to keep products on the shelf or you have an emergency, a second loan can help.
Of course, it’s important to note that it may not always be the best option and in some cases, it may not be an option at all. Many lenders won’t allow you to have several loans at once and using debt to pay off debt can be dangerous. Debt is powerful but risky. You must know what you’re getting into before you agree to additional financing.
In this blog, we’ll explain how a second loan can be beneficial for your business.
Why Do You Want a Second Loan?
First of all, you need to consider why you want a second loan. Did a unique opportunity or did you not get as much funding as you expected to begin with? Are you behind on monthly payments or is your cash flow suffering?
A second loan may not necessarily be the best option for your business. In some cases, it may be better to improve your revenue, cut expenses, or refinance your current loan. In some cases though, a second loan may be best:
- You need complementary financing
- Additional financing will bring more business
- Additional financing will facilitate growth
Again though, keep in mind that combating debt with debt is dangerous. If you’re behind on your payments and need funds to get out of a bind, you may want to look elsewhere.
Is a Second Loan an Option?
In some cases, a second loan isn’t an option. Many times, lenders don’t allow customers to have more than one loan at a time for several reasons:
- Interest rates
Discuss your options with your lender. If you have a decent credit score, consistent revenue, and a business plan to increase your sales, you may be able to convince them to give you additional financing.
You may also want to consider different types of financing. If you have a term loan, consider a business credit card or business line of credit. If you’re purchasing equipment, you may want to consider equipment financing.
4 Financing Options for Second Loans
Below are 4 financing options for second loans:
Merchant Cash Advance
A merchant advance is different than a traditional loan. You are trading tomorrow’s earnings for cash today. You’ll get a lump sum of money and repay it with a percentage of your sales.
Your sales are used to determine your MCA payments, so lenders are confident that you’ll be able to repay the advance. MCAs are ideal if you need access to immediate cash. It’s important to note that MCAs are not the most affordable option.
Invoice factoring is when you sell your outstanding invoices for immediate capital. If your customers are late or fall behind on payments, you can sell those invoices to a factoring company.
The invoices act as collateral, so you don’t need to provide additional collateral for invoice factoring. This is easier to obtain, and the funds can be used to pay off other loans or improve cash flow.
Invoice factoring is not giving you new money- but giving you the money you’re owed quicker. It’s important to note that the factoring company will take a portion of the funds as payment for their services.
Equipment financing can be used to purchase equipment for your business. The equipment is the collateral for this loan, so your business is not at risk, and you do not have to give a personal guarantee.
If you need new equipment to improve sales and keep up with demand, equipment financing is the best option. Since the new equipment will likely increase revenue, lenders see these loans as less risky.
A Business Line of Credit
This is technically not a loan, but a revolving credit line that increases your working capital and provides you with additional funds. It can help if disaster strikes or when you have clients that don’t pay on time.
Plus, you will only pay interest on what you borrow instead of the full amount. So, if you don’t use it, you won’t have to make payments. This is the most versatile option when it comes to financing.
If you borrow and then pay back the balance in full, you don’t have to worry about interest payments. On the other hand, if you’re not able to pay it off right away, you can make monthly payments until it’s paid off.
If you are considering taking out a second loan for your business, you need to give it some thought. On the other hand, if you have considered your options and you’re ready to move forward, contact Gipson Financial Solutions today to get started.