We all have to deal with the unexpected, but an unexpected financial event is especially stressful. If you have a financial emergency, you may need to take out a loan. That emergency may be due to a personal issue or a business challenge. If you encounter some difficulty securing a traditional loan from a bank or credit union, you may need to look to other options; consider a firm that offers alternative lending.
Common Financial Problems
Here are some financial emergencies that may require you to borrow money:
1. Car repairs
Nothing is more frustrating than sitting on the side of the road with a car problem. It's a huge interruption of your normal schedule and can prevent you from getting to and from work. Worse, car repairs aren't cheap. In most cases, you don't know the cost of the repair until the car is at the shop. That makes planning to pay for a repair even more difficult.
A wedding is a big life event and according to Knot's 2014 Real Weddings survey, the average wedding spend is now $31,213. You may start planning your wedding and realize that the cost will be higher than you expected. Planning a wedding is stressful, because your new spouse, friends and family members may all have different expectations. If the date is set and friends and family have made travel arrangements, it's hard to change plans.
3. Refinancing credit card balances
Juggling personal finances can be a tricky game. If you have credit cards, you need to carefully track the payment dates and amounts due. If you're not able to make specific payments on time, you'll incur big penalties and if you can't pay them at all, you'll need to refinance. On top of the financing, making late payments will negatively impact your credit rating.
4. Business costs
If you own a business, you might invest your personal assets, including your savings, in the company. If the company sales don't generate cash quickly enough, you may not be able to take money out of the business to pay yourself. Keep in mind that you need to maintain a good personal credit rating and the credit rating for your business.
All of these situations require an emergency loan, but that's not an option for many people. This is where alternative lending comes in.
Alternative Lending: Personal Loans
Personal loans are different from a traditional loan agreement with a bank or credit union. If you're facing a personal financial emergency, consider the following types of alternative loans:
An unsecured loan is simply a personal promise that you'll pay the loan back. This loan does not include collateral. When you take out a car loan, the car itself serves as collateral that you'll pay the loan back. The same rule applies with a home loan -- your house is the collateral. Unsecured loans are based on your monthly income. The lender is making a judgment that you have enough money to pay back the loan.
You can also borrow money by pledging an asset to get a loan. Think about any items you own that have value, such as a car, fine jewelry or rare artwork. Stock and bonds can serve as collateral, too.
Alternative Lending: Business Loans
Company finances can also have a big impact on the personal finances of the business owner because many business owners invest their personal cash into their business. If you run into personal finance issues, you might not have your own savings to help you.
If you're a business owner, your company profit is likely your primary source of income. If a business challenge prevents you from taking profits out of the business, it can put you in a bind. Look into these alternative loan options:
Businesses often have a cash shortage when customers owe them money but haven't paid their invoices yet. In many cases, these unpaid invoices belong to trusted customers who you know will eventually pay. Factoring means that you borrow money using these receivables (unpaid invoices) as collateral. The company that loans you the money collects the receivables from your clients.
If you have an established base of customers, you have some other options. You may be able to presell products to clients before you produce the product or service. The customer pays you for a product that they receive in the future. As with any type of loan, you do have an obligation. In this case, it's to provide the product or service in the future.
Friends and family
While it can be a tricky situation, you certainly have the choice of approaching a friend or family member for an emergency loan
. It might be a short-term loan that you can pay back quickly. However, if you have trouble repaying the loan, it can damage a relationship. To make the loan more formal, consider pledging company assets (vehicles, equipment) as collateral for the loan.
Finding yourself in need of an emergency loan is stressful, but it's important to think wisely about your best options. If you can't find a loan through a traditional bank or credit union, consider alternative lending options.