Working Capital Loan vs. Online Unsecured Business Loan: Determining Which is Right for Your Business
Starting a small business is an exciting yet terrifying prospect all at once. The statistics tell a story. Approximately 20% of businesses survive past their first year of operation, which is a number that has held steady for around 30 years.
But what is the reason for this?
It’s a lack of cash flow. They simply run out of money to keep the company running from day to day and week to week. That’s why entrepreneurs have two main options on the table to counter this problem. They can take out a working capital loan or an online unsecured business loan from a place such as Capital Alliance.
What are these loans and which is best for your business?
What is a Working Capital Loan?
A working capital loan is a simple concept to understand. It’s designed to cover only the regular operations of the company, such as paying employees and covering electricity bills for the office. It’s not designed for long term investments, like buying assets.
What is an Online Unsecured Business Loan?
An online unsecured business loan means you don’t put up any collateral to receive the loan. You also don’t have to go into a bank and negotiate the loan because it all happens online. Capital Alliance says that these loans are more flexible than working capital loans because you’re not restricted in what you can use them for.
Unlike a working capital loan, you can choose to buy an asset (or anything else) with an online unsecured business loan.
Putting Up Collateral
29% of businesses fail because they run out of cash to cover their expenses. Technically, both of these loan types can be used for the purposes of covering your regular expenses. But you have to keep the issue of collateral in mind.
Your working capital loan is typically tied to the business owner. They must put up some form of collateral to receive this loan. It could be the business’s assets, or they could even have to put up their own home to receive it.
An unsecured business loan found online doesn’t come with the same requirement. But there’s greater risk for the lender, so there’s a tradeoff.
Dealing with Interest Rates
Your online unsecured business loan may not come with the need for collateral, but your interest rates will more than cover that. If a lender has no guarantees the risk is greater, so they need to combat that by increasing your interest rates. These interest rates for new businesses can be quite high because you have no prior record.
Working capital loans also come with risk, so you’re never going to find extraordinarily low interest rates unless you go with PayPal Working Capital. But what you can expect is better rates if your personal credit score is better.
Where Credit Score Comes into It
Like with any type of loan, your credit score is important. The problem is that since you just started your business your company has yet to build its credit score.
But lenders have figured out a way to deal with it. They’ll use the business owners’ personal credit score, as if they were taking out a personal loan. It’s important to know your credit score because the banks say the number one reason they decline loan applications is that 45% of businesses don’t understand the role of the credit score.
The working capital loan will typically tie your loan to your personal credit score. If you default it will hurt your personal credit score. On the other hand, if you pay it back it will benefit your personal score.
This is rarely the case with the online unsecured business loan. It’s all on your business. That can make it harder to leverage your own personal credit score to get a better rate.
So What is Best for Your Business?
First of all, it depends on what’s available. Entrepreneurs starting out often don’t have much of a choice. The biggest piece of advice is that you should think carefully about bringing your personal assets into it.
The online unsecured business loan is definitely more flexible, but at the same time it puts the pressure on with higher repayments.
Consider how long your business can operate for without making any money and compare it with your business plan.
Do you have the time you need to make your business a success?