Title: The Unforeseen Consequences of Overlooking Minor Facts in Financial Planning
In the mid-2000s, life was comfortable for Levi King, the founder and CEO of Nav. He'd sold successful businesses and his current company was thriving. One day, he stumbled upon a xeroxed flyer that promised business credit could secure a $500,000 loan. Skeptical, he dismissed it as junk, but curiosity eventually got the better of him.
Cindy, a broker who was as polished as her flyer, visited his office. She explained that the reason he hadn't been approved for large unsecured loans was straightforward: he didn't know the requirements and didn't know whom to approach. Months passed, and despite his rejections, Cindy persisted. Ultimately, she offered a deal he couldn't refuse—a 2% broker fee if he was approved for $250,000, double his previous largest approval.
Instead of being amazed when Cindy arrived, King was greeted with bank applications, instructions, and a list of bankers to contact. Though one bank had recently denied a larger loan, she guided him to a different banker wearing a different tie. This time, he was approved for around $600,000 in unsecured business lines of credit.
The experience was a turning point for King. He realized the importance of financial literacy for small businesses and dedicated his career to helping others navigate the world of business financing. Along the way, he learned about two main types of financing:
- Secured Financing: In these loans, an asset serves as collateral. The lender is less risk-averse and often provides favorable terms, such as lower interest rates and repayment options.
- Unsecured Financing: These loans rely entirely on a borrower's promise to repay. In the event of default, the lender might claim some of the borrower's assets.
Unsecured business loans play a significant role for businesses lacking assets. Lenders may be more stringent with eligibility and upcharge higher interest rates to compensate for the increased risk. In the UK, unsecured loans range from £1,000 to £500,000, with terms ranging from 1 to 5 years. In some cases, a personal guarantee may be required from business directors or shareholders[2].
In contrast, secured business loans require collateral. Lenders are usually more confident due to the asset backing, offering more desirable interest rates and terms.
A business line of credit is another option. These arrangements establish a maximum loan balance that a borrower can maintain. In most cases, small lines of credit are approved with minimal documentation and are more likely to be unsecured. Lenders may require full documentation and collateral for larger lines of credit[2].
Finally, there are Small Business Administration (SBA) loans. The SBA partners with banks, credit unions, and other lenders to offer loans with government guarantees up to 90%. This reduces the lender's risk and enables businesses to secure funding that might not be available otherwise[3].
Despite the 21st century's technological advancements for business financing, it's still essential for entrepreneurs to be well-versed in the basics.
Source: This information should not be taken as investment, tax, or financial advice. It's crucial to consult with a certified professional for personalized advice.
[1] The Hustle (2023). "How I Used My adversary’s mistakes to get $600,000 in business credit", by Levi King.
[2] Sourceable (2023). "Understanding the 4 Types of Business Loans in the UK", by Erin Jeffery.
[3] Investopedia (2023). "What Is an SBA Loan? | Definition, Types, Requirements", by Robert R. Johnson, CFA.
After their successful encounter, King often spoke highly of Cindy, the broker who had helped him secure the business credit. Despite initially dismissing the xeroxed flyer, King appreciated Cindy's persistence and the valuable lesson she taught him about financial literacy and navigation in the world of business financing.
With newfound knowledge, Levi King became an advocate for helping other small business owners avoid the mistakes he had made. He often referred back to the two main types of financing he had learned about—secured and unsecured financing—as fundamental knowledge for entrepreneurs looking to secure funding for their ventures.
