The Pros and Cons of Working Capital Loans
Working capital can often be crucial to the daily operations of a business. This may include paying employees, purchasing inventory and supplies, paying the bills and more. While businesses may rely on revenue and savings for these expenses, there are times, however, when expenses may be greater than the money available to pay for everything. Even companies who are selling well may experience some issues. This may occur, for example, when clients are delaying their payments on their accounts receivables or when retailers want to increase their inventory supplies for the holiday before any purchases can be made. Getting a loan for these daily expenses can be an ideal way for businesses to be able to afford to run the organization.
The Advantages of Working Capital Loans
Working capital loans can have many advantages over other methods of obtaining money. First, they are generally easier to obtain than other forms of loans, since the lender normally does not require a detailed explanation for the reason of the loan. Instead, businesses will receive a certain amount of money to use as they see fit to pay daily expenses when necessary. Additionally, getting approved for this type of loan is usually faster than receiving a more traditional loan. Furthermore, these loans also tend to be better than selling equity to make money, since selling equity typically means giving up a share of company’s ownership and, therefore, a share of the profit. With a short-term loan, businesses can get the money they need but still retain full ownership.
The Disadvantages of Working Capital Loans
Unfortunately, working capital loans do have some disadvantages. A big thing to consider is that this money is not for free, and businesses will need to repay their loans. Additionally, since these loans are usually short-term, the loan will generally need to be repaid a lot sooner than long-term loans. Moreover, since some lenders may not take any assets via collateral in case the loan cannot be repaid, they will generally need to find another method getting at least a portion of their money back. This will often be accomplished through higher interest rates. Furthermore, some lenders may, in fact, require some collateral, and the inability to pay off the loan get lead to losing assets.
A working capital loan has both its pros and cons. Nevertheless, it can be a quick and practical solution for businesses that just need a little extra money for a short time and are confident that they will be able to make enough money before payments on the loan are due.