Understanding the Pros and Cons of Working Capital

Every business needs some kind of capital to get up and off the ground, but for many entrepreneurs, the only money that they have is the money they use to put food on their own tables and clothes on their backs. As a business begins to flourish, the operating costs only increase to include more employees, more materials and more of everything. While a new owner could continue to use his or her own personal money to fund business growth, a better idea would be to pull out a working capital loan. If you have recently started a new business and are trying to decide if a loan is right for you, consider the pros and cons of one first.


The Advantages of a Start Up Loan


If you foresee big growth in your company’s future, pulling out a business loan may not be a bad idea. The biggest benefit by far is the ability to handle any financial difficulties that arise without falling into the red or pulling out one secured loan after another. You won’t accrue a ton of interest in the process, and when you can repay it, you can do so quickly and in a few installments instead of over several smaller payments.


Another advantage or a working capital loan is the fact that many come without the need for collateral. If you have a good credit history, you can get an unsecured loan without having to put any of your assets on the line.


A third advantage to this type of loan is the speed with which they are typically granted. In most cases, business owners can obtain the capital they need within a week, enabling them to take care of financial difficulties immediately.


The Cons of a Start Up Loan


Though a working capital loan offers many benefits, it can have its pitfalls. One major disadvantage of these loans is the strict terms. While shorter terms are an advantage in some situations, if you need capital for long term growth, this type of loan is not for you.


Another disadvantage of these types of loans is their impact on credit scores. Though pulling out a single loan or two will not hurt your credit score, if you keep relying on them to get you out of tight spots, you risk damaging your credit, as the more you apply, the more your score decreases.


The final disadvantage of an unsecured loan is the high interest rate. Because these types of loans are riskier for lenders, borrowers can expect to pay more than if they were to access secured business loans.


A working capital loan can be a great way to get your business off the ground, but before you obtain one, consider the pros and cons and make sure one is really right for you.

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