Most Australian companies will need an injection of cash at some point in time, known as a working capital loan.
They’ll need this capital to help them get through the tough times when business is slow, and they need money for their daily operating expenses.
Because these loans are short-term to tie businesses over difficult trading periods, getting the cash is often easier and quicker than other complex business loans. All businesses need cash in the bank to survive. Cash is the lifeblood of a business, and without having it handy, you’ll have to shut up shop; simple as that! Without it, you can pay staff, bills, suppliers, stock, rent; you’ll be in deep strife, and this is where a working capital loan is so vital for business survival; especially in 2021 during this insane COVID period.
In this article, I’ll discuss the pros and cons of Working Capital Loans.
The Pros of Working Capital Loans
Well, the good news you have decided to go for a working capital loan for your business. Following are some reasons why this is a great choice.
You get the cash to deal with your financial situation immediately.
It doesn’t matter how successful your business is. At some point in time, you will find that you need extra money to buy stock, inventory or take advantage of a great deal. You need the funds in the bank to do this. A working capital loan gives you the freedom to do as you like with the cash and free up funds so you can continue with the running of your business.
You can borrow and repay it quickly.
Working capital loans are often small, so you can get access to the cash quickly and repay the loan when times improve. These loans are not long-term, so you are not stuck with a hefty business loan with large monthly interest repayments that last for years. It’s a short term, a fast loan designed to help your business out of a tight spot that you can repay quickly.
You keep full ownership of the business.
Other loans like equity loans are a solution for small businesses requiring funds without going to the bank. But they do come with strings attached, such as diluting ownership of the company. Just imaging having to give up a percentage of your business? Not ideal if you are the type of person that likes to retain control. A working capital loan gives you the funds without compromising any ownership; a win-win for your business. You get the cash, and you keep 100% control.
You can spend the money in any way you like.
Once you have the working capital loan, you can choose to spend it on what you like. Unlike other loans like construction business loans, where the money borrowed has to be paid for a specific purpose, a working capital loan is flexible in terms of what you want to spend it on.
The Cons of Working Capital Loans
Before applying for your working capital loan, there are some drawbacks and cons despite all the advantages you should be aware of.
You have to pay the loan back eventually.
Dah! You’ll have to pay it back. Don’t think that you can keep the money and not pay it back even though it’s a small amount. If you don’t pay it back on time, it will affect your credit rating and credit score.
You will need security for the loan.
You have to provide some collateral or security for the loan, which means that you’ll have to put your house or property up as collateral. And, if you fail to repay the loan or not meet your interest repayments, the lender may end up selling your asset to reclaim the loan, and any interest payments missed.
Some lender may charge higher interest rates.
Higher interest rates may apply to some working capital loans from lenders who do not require security and opt for an unsecured loan. Typically, banks operate in this way dso be very careful of higher interest charges. Having said that, higher interest rates are only with certain lenders. On the other hand, Sparrow Loans will give you super-attractive and very competitive interest rates that are one of the markets best for your working capital loan.
It may affect your credit rating.
Every time you apply and get approval for a working capital loan, it shows up on your credit report. And, if there are too many applications, this may show that your business is in financial hardship. Watch out for this one!
Conclusion
Working capital loans are a fantastic short term solution to give your business the financial shot in the arm during tough times. They are quick to get and not overly excessive, so repaying them should be hassle-free. Hence, they are a fantastic option for the majority of small businesses. There are a few downsides, but if you read the fine print and are aware of the cons, you’ll be in an excellent position to continue the business.
