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According to the Federal Reserve, Americans carry around $5,800 in credit card debt from month to month. Making the minimum monthly payment on that debt would take 30 years to pay off, and include an additional $15,000 in interest. According to the Administrative Office of the Courts, 2,078,415 bankruptcies were filed in 2005–the largest number of bankruptcy petitions in the history of the federal courts. With the new tougher bankruptcy laws, people are looking for alternative ways of managing their debts.Debt consolidation loans are a popular way for people to free up money each month by consolidating several monthly credit card payments into a single lower interest loan. But, the question is whether it’s best to consolidate those debts into a home equity loan or an unsecured debt consolidation loan.Debt Consolidation Home Equity LoansA home equity loan is a one-time lump sum of money you receive in the form of a second mortgage that is secured by the equity in your home. Equity is the difference between how much the home is worth and how much altogether you own on it.A second mortgage loan is usually a fixed interest loan with rates that runs slightly higher than those of a first mortgage loan, unless it’s a 125% Loan To Value (LTV) loan that allows homeowners to borrow beyond the value of their homes. Those rates usually run much higher that other second mortgages and origination fees can be as much as 10% of the loan balance.Home equity loans usually are repaid in a shorter time than first mortgages, with repayment periods typically being between 5 and 20 years. Like a first mortgage, you have to pay off the balance of a home equity loan when you sell your home, so it’s best to find out if there are any prepayment penalties or balloon payments on your loan in case you decide to pay the loan early or sell your house before the loan matures.Benefits and Drawbacks of Home Equity LoansThe main benefit of a debt consolidation home equity loan is that most states allow you to deduct up to 100% of the interest you pay on your taxes. Other benefits include the fact that home equity loans typically have a lower interest rate than unsecured loans, and borrowers can get relatively large amounts of money.While home equity loans have attractive benefits, there are also major drawbacks. One is that if you fail to meet the payment schedule required by the loan, the lender can foreclose on your home and you will lose it even if you go into bankruptcy. Secured loans are not dischargeable by Chapter 7 bankruptcy.Another major drawback is that exploitative lenders target homeowners, especially those with low incomes or poor credit. According to the Federal Trade Commission (FTC), there are many predatory scams, including:· Equity Stripping: The loan is based on the equity in your home, not on your ability to repay it.· Credit Insurance Packing: The lender adds credit insurance to your loan, which you may not need.· Bait and Switch: The lender offers one set of loan terms when you apply, then pressures you into higher charges when you sign to complete the transaction.· Deceptive Loan Servicing: The lender doesn’t provide you with accurate or complete account statements and payoff figures. That makes it nearly impossible for you to determine how much you’ve paid and how much you owe.If you are not sure whether a home equity loan is right for your needs, you may want to consider an unsecured personal debt consolidation loan.Personal Unsecured Debt Consolidation LoanIf your credit is relatively good, and you are employed, you may be able to obtain an unsecured personal loan to pay off some or all of your high-interest credit card debts. With a personal unsecured debt consolidation loan, there is no collateral against the loan. This means that the lender is relying only on your promise to repay the loan according to the loan’s terms and conditions. While the loan amounts are not as much as those of debt consolidation home equity loans, they can amount up to $10,000. Loans up to $1,000 may not even require a credit check.When shopping for a personal unsecured debt consolidation loan, it is important to shop around for the best rates and loan terms. Unsecured debt consolidation loans have lower interest rates than credit cards, but they generally have higher interest rates than secured personal loans like home equity loans. Some loans allow you to take anywhere from one to five years to repay, which can ease financial stress.Benefits and Drawbacks of Personal Unsecured Debt Consolidation Loans
The main benefit of getting an unsecured debt consolidation loan is that if you are forced into bankruptcy, the unsecured debt may be discharged in the bankruptcy proceedings.The main drawback is that you must have good to excellent credit to get an unsecured debt consolidation loan, and the loan amounts are typically less than a home equity loan. The interest rates on unsecured debt consolidation loans are typically much higher than that of a home equity loan, and it is not unusual for a debt consolidator to obtain a commission of 10% or more on your new loan.In ConclusionThe answer to the question of whether you should get a debt consolidation home equity loan or unsecured personal loan all depends on your financial circumstances. If you have relatively good credit, are employed and only a few debts you need to consolidate, you may benefit from getting an unsecured personal loan. However, if your credit is not so good or you have a lot of debts, a home equity loan may your best answer.

When you need quick cash, what could be more convenient than taking out a same-day payday loan that is deposited directly into your bank account? On your next payday – a week or two later – the loan is automatically repaid because the creditor has your bank information. Sure, there is a fee, but there’s no credit check, no collateral, and no lengthy application process like there is for a personal loan. You just walk into the payday loan office or go online, fill out a few forms proving that you have a steady job and a checking account, and you get up to $2,000 the same day.It sounds easy, but it may not be such a good deal. Payday loans are defined as short-term loans with an interest rate above 36%. That sounds like a high rate, doesn’t it? After all, you see new car loans advertised for zero percent, and home mortgages for 6%. Personal loans from banks are generally between 10% and 15%. Even credit card cash advances can be cheaper. A $300 cash advance on the average credit card, repaid in one month, would incur a finance charge of $13.99 at an APR of 57%.To make it sound less expensive, payday loan providers don’t advertise their annual percentage rate (APR) the same way credit card and personal loan providers do. They state the interest in terms of a fee per $100 loaned. Here’s a typical example.How the Fee Translates to APR You walk into the payday loan office or apply online. You need to borrow $500 until your next payday, which is in seven days. The fee for your loan is $15 per $100 borrowed. You think, “That’s not so bad, it’s 15%, isn’t it”? You agree to the loan terms and you give the lender a check in the amount of $575, dated in seven days.When your loan is due to be repaid in seven days the creditor will cash the check or debit your checking account. If you have $575 in your account, then you are finished and the transaction is completed.You will have paid $75 for your loan. That translates into an annual percentage rate (APR) of 780%. It’s very high, but that’s because calculating the APR is complex and involves not only the loan amount and the fee, but the period of the loan-how long until you pay it back.The big danger is that many customers can’t pay back the loan on time. Think about it – a customer who does not have $500 in his or her bank account this week is unlikely to have $575 in their account next week. Many customers “roll over” their loans. They cannot pay on the due date, so the creditor charges the $75 fee and agrees to collect on the next payday.Are You the Average Payday Loan Customer?According to the Consumer Federation of America, from a single lender each year the average payday loan customer takes eight to thirteen payday loans or loan renewals. So if you are the average customer, let’s say you roll over or renew your $500 loan 10 times in one year. To borrow $500 for 10 weeks, you will pay a total of $750 in finance charges plus repay the amount borrowed. Your $500 payday loan will end up costing you $1,250.There are additional risks and fees. To get a payday loan you are required to give the creditor a personal check as repayment. If your check bounces, your bank will charge you a fee – often as high as $40. You can lose your bank account or have difficulty opening a new bank account if you develop a record of bouncing checks used to get payday loans.Before you take out a payday loan, carefully consider the real cost – and ask yourself if it’s worth it.

There are several potential financing options available to cash-strapped businesses that need a healthy dose of working capital. A bank loan or line of credit is often the first option that owners think of – and for businesses that qualify, this may be the best option.

In today’s uncertain business, economic and regulatory environment, qualifying for a bank loan can be difficult – especially for start-up companies and those that have experienced any type of financial difficulty. Sometimes, owners of businesses that don’t qualify for a bank loan decide that seeking venture capital or bringing on equity investors are other viable options.

But are they really? While there are some potential benefits to bringing venture capital and so-called “angel” investors into your business, there are drawbacks as well. Unfortunately, owners sometimes don’t think about these drawbacks until the ink has dried on a contract with a venture capitalist or angel investor – and it’s too late to back out of the deal.

Different Types of Financing

One problem with bringing in equity investors to help provide a working capital boost is that working capital and equity are really two different types of financing.

Working capital – or the money that is used to pay business expenses incurred during the time lag until cash from sales (or accounts receivable) is collected – is short-term in nature, so it should be financed via a short-term financing tool. Equity, however, should generally be used to finance rapid growth, business expansion, acquisitions or the purchase of long-term assets, which are defined as assets that are repaid over more than one 12-month business cycle.

But the biggest drawback to bringing equity investors into your business is a potential loss of control. When you sell equity (or shares) in your business to venture capitalists or angels, you are giving up a percentage of ownership in your business, and you may be doing so at an inopportune time. With this dilution of ownership most often comes a loss of control over some or all of the most important business decisions that must be made.

Sometimes, owners are enticed to sell equity by the fact that there is little (if any) out-of-pocket expense. Unlike debt financing, you don’t usually pay interest with equity financing. The equity investor gains its return via the ownership stake gained in your business. But the long-term “cost” of selling equity is always much higher than the short-term cost of debt, in terms of both actual cash cost as well as soft costs like the loss of control and stewardship of your company and the potential future value of the ownership shares that are sold.

Alternative Financing Solutions

But what if your business needs working capital and you don’t qualify for a bank loan or line of credit? Alternative financing solutions are often appropriate for injecting working capital into businesses in this situation. Three of the most common types of alternative financing used by such businesses are:

1. Full-Service Factoring – Businesses sell outstanding accounts receivable on an ongoing basis to a commercial finance (or factoring) company at a discount. The factoring company then manages the receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative finance that is especially well-suited for rapidly growing companies and those with customer concentrations.

2. Accounts Receivable (A/R) Financing – A/R financing is an ideal solution for companies that are not yet bankable but have a stable financial condition and a more diverse customer base. Here, the business provides details on all accounts receivable and pledges those assets as collateral. The proceeds of those receivables are sent to a lockbox while the finance company calculates a borrowing base to determine the amount the company can borrow. When the borrower needs money, it makes an advance request and the finance company advances money using a percentage of the accounts receivable.

3. Asset-Based Lending (ABL) – This is a credit facility secured by all of a company’s assets, which may include A/R, equipment and inventory. Unlike with factoring, the business continues to manage and collect its own receivables and submits collateral reports on an ongoing basis to the finance company, which will review and periodically audit the reports.

In addition to providing working capital and enabling owners to maintain business control, alternative financing may provide other benefits as well:

It’s easy to determine the exact cost of financing and obtain an increase.
Professional collateral management can be included depending on the facility type and the lender.
Real-time, online interactive reporting is often available.
It may provide the business with access to more capital.
It’s flexible – financing ebbs and flows with the business’ needs.
It’s important to note that there are some circumstances in which equity is a viable and attractive financing solution. This is especially true in cases of business expansion and acquisition and new product launches – these are capital needs that are not generally well suited to debt financing. However, equity is not usually the appropriate financing solution to solve a working capital problem or help plug a cash-flow gap.

A Precious Commodity

Remember that business equity is a precious commodity that should only be considered under the right circumstances and at the right time. When equity financing is sought, ideally this should be done at a time when the company has good growth prospects and a significant cash need for this growth. Ideally, majority ownership (and thus, absolute control) should remain with the company founder(s).

Alternative financing solutions like factoring, A/R financing and ABL can provide the working capital boost many cash-strapped businesses that don’t qualify for bank financing need – without diluting ownership and possibly giving up business control at an inopportune time for the owner. If and when these companies become bankable later, it’s often an easy transition to a traditional bank line of credit. Your banker may be able to refer you to a commercial finance company that can offer the right type of alternative financing solution for your particular situation.

Taking the time to understand all the different financing options available to your business, and the pros and cons of each, is the best way to make sure you choose the best option for your business. The use of alternative financing can help your company grow without diluting your ownership. After all, it’s your business – shouldn’t you keep as much of it as possible?