Types of security you should use to get your start up loan
Running a business involves many expenses that require up-front financing to keep it operating smoothly. Maybe you've planned ahead and have all the money you could ever want to start your business. More likely, however, is that you have a little money to start with and require some sort of loan to get your business up and running. Financing then becomes your new favorite word. Financing your business effectively involves knowing about financial arrangement options and which lenders to approach about your loan. With each loan you get to start up your business, you will want to also get some security. But how do you know which type of security to get for your start up loan? And what kind of loan would be best for your business?
First of all, your business will have many day-to-day expenses, not just start-up ones. As a new business, you may need different loans for your different needs until your business is up and running smoothly. Here are a few things that you may need loans for:
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Business expenses? such as licenses, permits, professional services (legal, accounting or insurance) leases, furniture, equipment, retail inventory, etc.
Business capital? this is the money that finances your business for the day-to-day business operations
Equity? this is money that usually comes from the personal funds of the partners and stockholders.
Leverage? this is the relationship of debt financing to equity financing. It should usually have a ratio of 2:1 or, better yet, 1:1.
There are many different options for loan security agreements. These simply ensure the repayment of a loan. Most of them are a form of written guarantee that the sum will be returned to the lender according to the terms of the loan, or the debtor will incur a loss of assets to replace the debt.
So what should you use as security for loan agreements? Let's start by what you should not use as security (unless one of these is all you have to offer as security).
1. Your house: this could end up badly for your family if your business fails and you can't pay your loan. You wouldn't want them to end up homeless now, would you?
2. Your emergency savings: this could also end up badly for your family if your business fails and then you run out of money.
3. Your life insurance policy: if something fatal happens to you and your business fails, your family will suffer because they won't have any form of support to survive on.
Some assets that would be good to use as security for loan agreements are as follows (again, they may not all apply to you).
1. Your cars: cars can be replaced for cheaper models or turned in for profit.
2. Investments
3. Your children's college funds: if your business fails and you loose all their college money, don't worry. Maybe your kids are young enough that you'll have time to rebuild their fund. If not, they can take out school loans to pay for their education.
4. Your real estate investments
5. Your boat, RV or other expensive toys
Please remember that not all of these suggestions will work for you. They are simply suggestions that may work for some people. Obviously if your children are between the ages of 14-17, you probably shouldn't use their college fund to start up your business. Consult a professional.
