Working Capital: What are the Pros and Cons for Working Capital Loans?

What is a working capital loan?

Undercapitalization is often one of the biggest obstacles holding a business back. You can’t make money if you don’t have money.  A lot of emerging entrepreneurs simply don’t have the cash to get their business off the ground – or recuperate after their business has seen some hard times. This is when many business owners start to consider the possibility of taking out loans, and that’s when the questions start. What kind of loan is best for my business? Can I still get a loan if I have a bad credit score? What if I need a loan to cover the operating costs of my business after a huge slump? Working capital loans offer the right answer to most of these.

Related: Working Capital Loans: What No One is Telling Business Owners

How many times have you thought, “The business will be fine if I can just get through the next couple of months (or the last sudden emergency)?”

Working capital loans give business owners more room to move their business forward. It’s perfect for a business owner going through tough times who are confident their business will come out on top.

Here‘s more information about working capital loans and just why you should consider one to keep your business afloat.

What Is A Working Capital Loan?

A working capital loan is defined as a short-term loan, used exclusively for the “working capital” of the business. That means to say a working capital loan covers operating costs – or where new business owners are usually falling short. Operating costs can be anything from your office rental through to wages, and a working capital loan can really help you out.

Working capital loans can help you address short-term financial needs. This is best used when you find yourself in a financial crunch and need an extra boost to stabilize your cash flow. It gives you a chance to cover cash flow gaps while you find other viable and more permanent ways to resolve your cash flow problems.

What Are The Pros Of Working Capital Loans?

Like any other types of loans, working capital loans help you address your business’ financial discrepancies. However, it also comes with its share of pros and cons. Before you fill out your loan application form, you have to make sure that you fully understand how it works. Here are some of the pros and cons of working capital loans.

Related: 4 Benefits Of Working Capital Loans For Construction Companies

Working Capital Loans are Short-Term Loans

Working capital loans are short-term loans. With that, they have been designed for the business owner who needs capital quickly – and can get back on their feet in weeks or months within taking the loan. Long-term loans can tie you up in years of payments and paperwork, but a short-term loan can be over quickly – at the benefit of your business.

 Working Capital Loans are Faster

Traditional loans have a lot of paperwork to fill in, and there’s no end-guarantee that you’ll be approved for the loan by the end of it. With working capital loans, you’ll know whether you have been approved within a much shorter time – usually 48 hours. This advantage alone can be a lifesaver to a business experiencing a financial emergency. Other loans can also have you waiting a while for the funds to clear, while working capital loans make their way to your account much sooner.

Working Capital Loans Require Little or Less Collateral

Traditional loans like personal, home, or business loans will often mean the business owner has to offer up some kind of collateral to the loan provider. This will be signed over to the provider if the business can’t pay the loan – this has put many great businesses in the ground, and for some, it’s too much to even risk.

But working capital loans are known for requiring very little to no collateral for the loan – and don’t put your business at nearly as much risk.

Early Payment Option

Because working capital loans are designed for the short-term, they usually have an early repayment option. If you can pay the loan sooner than the repayment date you initially agreed to, that’s just fine. In fact, it’s better that way – both for your business and for your overall credit score.

Related: 4 Reasons Why You Should Improve Your Personal Credit Score

What Are The Cons Of Working Capital Loans?

The advantages mentioned above are extremely attractive. But before you fully commit, consider these cons first.

No Partial Repayment Plans

Just because working capital loans are less risky than traditional forms of lending doesn’t mean they aren’t risky at all. You still carry a considerable level of risk if you are lending money as a business owner, and you must understand these risks when you sign up.

There are often no partial repayment plans in place for working capital loans, and you’ll have to pay the loan back in one amount – even when you file for Chapter 11 bankruptcy.

Sometimes Collateral

The business’ or entrepreneurs’ credit score will play a big role in the decision of whether working capital loans will require collateral or not. If you have a bad credit score, you could be marked as a risk by insurance companies and loan providers. In this case, you will be asked to offer up collateral for the loan. However, this isn’t always a bad thing; sometimes the right loan at the right time could be what your business needs.

Higher Interest Rates

Working capital loans are short-term loans. This means that they come with short-term loan terms. Here, the interest rates are usually higher than normal long-term loans, and business owners will have to decide whether this is a risk they are comfortable with taking.

Working Capital Loan: Is It Right for You?

In reality, not every loan is designed to solve every business need. In the same way, not all businesses will face the same financial issues. With that, every business needs require a unique loan in addressing the discrepancies. Working capital loans is among them. By applying for one, you get an additional cash injection and make sure that gaps in your cash flow will be covered. It provides you with the cash you need to cover the expenses of your day to day operations. Through this simple way, you’ll get to improve your business services and efficiency.

Like other types of loans, it comes with its advantages and disadvantages. So, it’s better to weight it all out first before proceeding with the application. Nevertheless, working capital loans are a good solution for businesses needing easy access to additional working capital.

Matthew Gillman

Related Articles