Working capital loans give businesses the opportunity to continue paying off day-to-day expenses, even during their off-season. These types of loans are not intended to be used to finance large investments or expenses but are more used to cover things like payroll and monthly rent.
A working capital loan is not a revolving line of credit but is usually based on a business owner’s personal credit. There are two types of working capital loans out there: Secured and Unsecured.
Secured Working Capital Loans
Secured working capital loans have the largest distinction from unsecured working capital loans in that they require collateral in case the business defaults on the loan. If they miss too many payments or stop paying altogether, the business could be forced to forfeit their collateral over to the bank in order to “pay” back the loan. Collateral in this instance could be a number of things like equipment, real estate, or even vehicles.
Because a secured working capital loan has collateral to base the loan off on, banks tend to feel more comfortable and offer lower interest rates than for unsecured loans. However, business owners are often leery of listing their assets in business loans because of the possibility of losing them down the road from missed payments.
Unsecured Working Capital Loans
Unlike secured loans, an unsecured working capital loan does not have the backing of a piece of collateral. This can have some potential positives (the approval process is typically faster without needing to value collateral) and drawbacks (interest rates are usually much higher). For the businesses that don’t have any assets to work with, or that are in a partnership with neither partner willing to potentially lose their assets if payments on the loan were missed, unsecured working capital loans are often a good choice.
Which Commercial Loan Option to Choose?
In all reality, the right type of loan to choose comes down to your specific business needs and situation. If you are in a new partnership with few (or no) assets to use as collateral, you might choose an unsecured loan. On the other hand, if you are more focused on getting the best rates with large assets to use as collateral, a secured working capital loan might be the way to go. If you are unsure of which working capital loan to choose for your business, we encourage you to reach out to one of our expert loan officers to give you advice based on your specific situation!