The Advantages and Drawbacks of Working Capital Loans

The Advantages and Drawbacks of Working Capital Loans

Now, we aren’t saying that every company will need a loan – but the truth is that most of them do. They need a working capital loan to help them meet their daily operating needs. And unlike most business loans, you won’t need to come up with a plan or a purpose for the loan – because this one is short term, and obviously just intended to improve the cash flow.

Every company needs to have working capital in order to survive. If you don’t have it, you can’t pay the staff or purchase stock; and if you can’t pay the staff or purchase stock, you can’t stay in business. This is exactly why working capital loans play such an important role in the survival of every business. In this blog, we discuss the advantages of Working Capital Loans.

The Advantages of Working Capital Loans

So you’ve decided to go for a loan; good for you. Here are the advantages that you can reap by applying for it:

You will have the money to deal with the financial crisis right away

Regardless of how successful a business is, it is bound to hit a financial wall at some point. Even a phase that involves rapid growth might be potentially dangerous since you’ll have to pay for new stocks, employees, and so on. Money doesn’t fall out from the sky, so you might need to rely on working capital loans.

You can borrow and repay it quickly

Since working capital loans are only designed to offer you a quick helping hand, they are not so difficult to deal with. The sums are small, so they are relatively very easy to pay and with a small default risk. In other words, you won’t have to pay for months or years to come in order to get rid of the loan.

You may not need collateral

While you may be asked for collateral if you have bad credit, you will generally not be asked to bring any collateral. The amount borrowed is not that big, so there will be no need for you to secure the loan – provided you qualify in terms of trustworthiness. Remember, however, that this also depends on the particular regulations of the credit union or bank that you went to.

You keep full ownership of the company

If you borrow from an equity investor, you will get some cash, indeed; however, you will also pass part of the ownership onto the investor. Borrowing working capital loans from an alternative lender or a bank, however, will allow you full ownership of the business, with the only condition being to stay committed to your repayment plan.

You can spend the cash however you want

Once you get the money, no one will care how you spend it. The lender will only want to keep your business running, so they probably won’t place any restrictions on how to use it.

The Advantages and Drawbacks of Working Capital Loans

The Drawbacks of Working Capital Loans

Before applying for working capital loans, here are some disadvantages that you need to consider.

You need to pay the money back

While this may sound completely obvious, it’s very easy to forget. Even if the loan doesn’t give you the kick that you need, you’ll still have to pay the full amount of the principal and interest.

You may be required to bring collateral

As stated above, collateral is not usually the case when it comes to working capital loans. However, certain situations, such as a bad credit history, may call for one. And it can be pretty risky to stake your assets on a loan; if you default, then your business will definitely fail.

You may be charged high interest

This may particularly apply if you go for an unsecured loan or you have bad credit. It also depends on the lender, since alternative lenders are more likely to charge high interest than banks. That rule is, of course, not set in stone. Some companies such as the ALC Commercial will give you attractive interest rates regardless of your financial situation, so you might want to give them a try.

You may compromise your credit rating

Each time you take out working capital loans, it will show on your credit history. This will show future investors or lenders than you tend to have regular financial problems – which will also make them increase the interest rate.

A Final Word

Working capital loans are a great way to give your company an “energy shot” to increase productivity. They’re fairly hassle-free when you compare them to traditional loans, and they are also very easy to settle. For this reason, there are some real benefits to working capital loans.

Keep in mind that while there are pros, these are also some pretty significant cons. Do some research before signing anything, and make sure that you know all the details.

For more information on business loans, commercial finance, debt consolidation, bad credit business loans and low-doc business loans talk to our experienced and understanding loan specialists to see how our business loans can support your business goals.

Share this post

You may also want to read...