3 Merits and Demerits of a Working Capital Loan

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A working capital loan is a means of transaction that allows independent lenders or agencies to present funds to businesses for covering their short-term, immediate, or urgent needs. For a business to remain viable in the market, paying off debts and tending to employee’s salaries, including miscellaneous payrolls is highly necessary. Many businessmen wager working capital loans to ensure that your business stays stable and at the same time, the sudden loss of assets doesn’t jeopardize your personal well-being.

Top 3 Merits of Working Capital Loans 

A working capital loan, however, is beneficial for businessmen who are looking for resources to cater to their day-to-day expenses regardless of including it as investments or assets. To understand how a working capital loan might be helpful for a novice entrepreneur in the industry, take a look at the 3 merits mentioned below.

• Secures Ownership Rights

If you consider taking funds from a third-party due to of financial deficits or loss in business, you might have to sign a contract and consent to the distribution of ownership rights. For instance, many people lend money with an exchange of security, since nobody wants to fund a business that’s deteriorating in the market without any promise of cashing back on added assets. In such a case, you see yourself parting with your ownership and including a third party as a partner having equal or more shares.

A working capital loan, on the other hand, waives you off this obligation by allowing you to exercise control of your ownership within the copyrights as per previous standards and agreement. The only requirement here is that you pay back the loan on time, and help alleviate your business of any drawbacks or deficits faced in the short-term.

• You’re Free of Any Collateral

It is necessary to consider that the third-party must need some kind of collateral if it’s fishing out a working capital loan to help your business in immediate need. While a few might require a business or personal collateral for security, many private business lenders or banks waive off this obligation by entrusting you with the working capital loan as long as you ensure to pay diligently and on time.

• Working Capital Loans are Ideal for Short-term or Temporary Fixes

If you’re unable to pay off your employees during an off-seasonal period of your business, consider taking a working capital loan so that your staff doesn’t have to suffer. Moreover, if you’re just starting out, you might experience issues while restocking the inventory in lieu of shortage or expenditure of funds. Since working capital loans aim to provide you with immediate funds for the maintenance and continuation of your daily operating expenses, you can apply faster and rescue your business from toppling over.

3 Demerits of Working Capital Loans

By now you must have understood the pivotal importance of the burning question, ‘What is Working Capital Loan, and how can it benefit me?” But before you celebrate victory, always remember that there are cons paired with an array of pros.

• Repayment is Your Priority

Let’s consider a circumstance where despite taking a working capital loan, your business fails to succeed and you have to consequently file for bankruptcy. Instead of opting to pay the investors for entrusting their funds and efforts in your business, you have to consider repaying your debt first, even if you’re bankrupt. You’d have to realize that repayment to your lender is a priority, and if you compromise the agreement terms or liabilities, you might be fined or undergo a legal notice.

• Collateral for Poor Credit

Many lenders waive off security only if you have a good credit history. If your business has always been a failure (as harsh as it may be) with a poor credit score, lenders might ask for a collateral in return. Collateral can be in terms of any business or personal engagement – you might lose your business or even your mortgage if you sign an agreement advocating the clause in lieu of nonpayment. Most lenders agree to an exchange of assets, but only as an extension till you prepare the loan and are ready to repay.

• Skyrocketed Interest Rates

Let’s suppose a scenario where despite having a poor credit history, a lender agrees to provide you with an immediate, unsecured loan on a short-term basis. Lenders might impose high interest rates on the loan, making it partially impossible for you to repay the amount alone in lieu of a failing business.

Before you consent to a working capital loan, make sure all your records and credit history is on paper. Talk to the lender in person to ensure the requirements as per collateral, exchange of assets and/or timely payment.

Working capital is an important part of any business as it maintains the flow of business. It comes handy especially when you need cash to expand or purchase materials. However, you can always get a working capital loan if you show that your business is liable enough to pay it back.