Do you have a business or company you are trying to finance? Owning your own business comes with plenty of assets to keep track of, and staying organized is essential if you want to reduce your financial risk. Loan liquidation may be a great way to take care of business expenses without acquiring a massive amount of debt.
But what is a liquidated loan? What’s the difference between a personal loan vs. a business loan? How do you know which option is right for you? CreditNinja has your back with all the answers you need here!
What Is a Self Liquidating Loan?
A liquidated loan means any loan that has been used to finance assets, where the money borrowed is repaid by the cash flow acquired by the sale of that asset. Ideally, a self liquidating loan should essentially pay for itself. Since self liquidating loans are meant to pay for themselves, the payback period for this type of funding is usually relatively short.
Business owners may utilize a self liquidating loan in order to prepay for assets needed to run their business. Then, as the business runs and sells off those acquired assets, business owners can use those proceeds to repay their loans.
For example, a shop owner that sells primarily winter clothes like heavy jackets, hats, and scarves may not sell very much inventory during the summer months. However, business is most likely much more profitable during the colder winter months. Therefore, towards the beginning of the season that business owner may use a self liquidating loan to purchase clothing they intend to sell in the winter. Then, after the season ends, the owner can use the profits made from their sales to pay off their loan.
How Does Loan Liquidation Work?
Getting a liquidated loan works much like getting any other form of financing. First, contact a lender and fill out a brief application. Upon approval, that lender will need to retrieve information about your finances, such as a credit score, how long your business has been running, how profitable your business has been in the past, and how much money you are looking to acquire.
After you’ve discussed the basics with your lender, they will then give you a loan contract to sign. Read everything carefully. If the terms look good to you, you can go ahead and sign your agreement and receive your money.
Can Loan Liquidation Affect My Personal Credit Score?
As long as you keep your business and personal finances apart, loan liquidation shouldn’t be able to affect your personal credit score. When you apply for a business loan, the lender may take a look at your personal credit score to ensure you aren’t a lending risk. But as long as the loan is taken out on behalf of a business, not you personally, your personal FICO score shouldn’t be affected at all.
If you plan on taking out a personal loan for business purposes, be sure to have a solid repayment schedule planned out to avoid a business loan having a negative effect on personal credit.
If you use a personal loan responsibly, you may end up seeing an improvement in your credit score over time. Your credit score is determined by various financial habits and behaviors, which include paying back loans and other financial obligations on time. When you keep up with your monthly payments, you are working towards establishing a healthy payment history and minimizing your debts. This type of behavior is particularly appealing to credit bureaus because it means you are a responsible and reliable borrower. Then, when you go to apply for funds again in the future, the lender will be able to see this positive history, which will increase your chances of receiving instant approval and potentially a better loan deal! The general factors that contribute to your credit score are:
- Payment history.
- The total amount of debt you owe.
- Types of credit accounts.
- Hard credit inquiries you have on your account.
- Length of credit history.
Why Is Having a Good Credit Score Important?
Credit scores are a financial tool used by lenders to determine how much of a financial risk a borrower may be. Borrowers with high credit are usually considered more reliable borrowers, which means lenders are more willing to approve them for a wider variety of loan products, higher loan amounts, more convenient payback schedules, are more. On the other hand, borrowers with a lower credit score may have a history of financial struggles, which may cause lenders to think twice before approving them for a loan.
How Do I Know if Loan Liquidation Is Right for Me?
If you own a business that sells goods or services you need to pre-invest in; a liquidated loan may be the right choice for you. However, before you dive into this type of business loan, consider the pros and cons first.
On the bright side, self liquidated loans allow entrepreneurs to immediately acquire the funding they need for their business needs. That way, they can make the purchases they need in order for their business to be successful up front instead of waiting until they earn enough profits on their own.
But, there are also potential disadvantages of a liquidated loan as well. Business owners who don’t make enough profits may not be able to pay back funding that was originally taken out to be a liquidated loan. In this case, the business owner would have to come up with some other means of repaying such loan. Depending on the state of your finances, this may be extremely difficult to do. It may be a good idea to have a financial business plan mapped out before you take out a liquidated loan.
Are There Other Alternatives Besides Self Liquidating Loans?
What if a self liquidating loan is not the right financial option for you? Good news, there are other financial options for you to consider.
However, when looking for an alternative loan, be mindful to stay away from predatory lenders. For example, some lenders market easy payday loans online as a convenient financial solution when in fact, these types of loans typically have high-interest rates and inconvenient payback terms. Before you apply for any kind of loan, do some lender research first, so you know you are going with the smartest option.
Check out more information below on other ways you can fund your business besides via self liquidating loans.
Investors are people who are willing to put their money toward a particular business venture. To acquire investors, put together a brief presentation explaining your business structure, how an investment would assist in making that business structure profitable, and how investors themselves can benefit by contributing funds. If your argument is convincing enough, you may be able to find people who want to invest in your business and share in the profits!
If you have a long-term business plan you need funding for; a short-term liquidating loan may not be the best way to borrow money. Instead, you can apply for a traditional business loan from banks or other financial institutions. Depending on your financial situation, these places may be able to offer you an extended payback plan, so you don’t have to worry about paying back your business loan immediately.
Business Line of Credit or Business Credit Card
If your business has recurring or varying expenses, a revolving line of credit like a business credit card may be the most convenient option. With a business credit card, you can pay for expenses as they pop up and only pay interest on what you spend. Your available line of credit will be renewed with each billing cycle, so you’ll always have that funding to fall back on if needed. But, be sure to prioritize paying off the balance; otherwise, you may find yourself with unmanageable debt that your business profits may not be able to cover.
Personal Installment Loans
Should you use a business loan or personal loan for small businesses? Well, that depends on a few factors. If your business is a small operation that doesn’t require a lot of startup financing, you may be able to get by with a personal loan for your business. For instance, a small business owner who makes candles in their basement may only need a small personal loan of about $1,000 or so to get the supplies they need to run their business. But, for more involved operations like restaurants or brick-and-mortar retail shops, entrepreneurs may need a larger business loan over a personal installment loan.
Bottom Line: Self Liquidating Loans and Loan Liquidation
A self liquidating loan may be the perfect financial solution for business owners who just need a bit of funding to kickstart their business for a short period of time. People looking for more time to repay their loans may want to look at the other options available. If you need financing for personal reasons, you may want to consider something like a personal installment loan from a direct lender.
Looking for more free financial resources about loans? Check out the CreditNinja blog!
Fund Your Business | SBA.gov