Pros and Cons of Working Capital Loans

Pros and Cons of Working Capital Loans

Undercapitalisation is one of the biggest obstacles holding small businesses back from achieving their full potential. Many entrepreneurs have trouble accessing capital to either get their expansion venture off the ground or recover from a setback that can potentially shut down their business.

Going for a working capital loan can help you inject cash into your business operations and get through the hard times to keep your business running and potentially grow from that. It is the best option if you are looking at covering your operating costs, meeting your business’ short-term financial needs or just an extra boost to stabilise your cash flow. However, there are advantages and disadvantages of working capital loans. And you must consider these when trying to solve your cash flow problems.

But what are working capital loan pros and cons?

Pros of Working Capital Loans

Some of the advantages of working capital loans, and reasons for applying for one, are:

Short Repayment Terms

Working capital loans are ideal for business owners that need a quick capital boost and can get back on their feet within months or even weeks. As a result, they usually have short repayment terms, allowing you to make the payments quickly and get back to your business.

Faster Loan Disbursement

As opposed to traditional loans, working capital loans need minimal paperwork and fewer eligibility criteria. As a result, approval and disbursement for working capital loans are much faster – usually within 24 to 48 hours from application. As a result, you can get a quick cash boost in a time of emergency and keep your business afloat in a time of need.

Require Little to No Collateral

Conventional loans – like personal or business loans – need some form of collateral as security, which is a great risk for many businesses in their time of need. Working capital loans, on the other hand, often require little to no collateral. And as a result, the risk of your business losing its assets is minimal.

Early Repayment Options

By design, working capital loans are short-term and have early repayment options within the loan terms. So, you do not incur any additional feed for paying the loan before the repayment data; in fact, it can even boost your credit score.

Cons of Working Capital Loans

Some of the disadvantages of working capital loans and reasons not to opt for one are:

No Partial Repayment Plans

Although working capital loans are comparatively lower risk, they still carry some risks for you as a business. One of the greatest risks with a working capital loan is the lack of partial repayment plans. So, even if you end up filing for bankruptcy, you will still need to pay back the loan amount in full.

“Risky” Borrowers Need Collateral

Your borrower profile and credit score play a significant role in determining your loan repayment terms and interest rate for a working capital loan. So, although working capital loans need little to no collateral, if your credit score is low, the lenders may consider you a high-risk borrower and require you to offer up collateral.

Higher Interest Rates

In traditional loans, short repayment terms often reflect higher interest rates. Working capital loans are the same. And as they are short-term loans by design, you need to assess whether you are comfortable risking a high-interest loan.

Is Working Capital Loan Right for You?

Not every business faces the same financial issues and may need different types of loans to solve their needs. When it comes to working capital loans, they allow you to quickly bridge the gaps in your cash flow or give a cash boost to your business in a time of need. However, it also comes with disadvantages like high interest rates or no repayment plans. So, you must weigh the pros and cons of working capital loans to determine whether a high-interest loan is worth the risk and if you could honour the short repayment term. However, despite its disadvantages, a working capital loan is a good solution to keep your operations running smoothly, allowing you to get back on your feet.

Key Takeaways

A working capital loan is a great tool to ensure your day-to-day business operations continue without disruptions when times get tough. But even though they provide a cash injection to bridge the gaps in your cash flow, weighing the advantages and disadvantages of a working capital loan to determine if it is the right choice for you is a must. So, weigh the pros, like a short repayment period, faster disbursement and early repayment options, against the cons, like higher interest rates and lacking partial repayment plans, before applying for a working capital loan. 

And if a working capital loan is right for you, Electronica Finance Ltd (EFL) working capital loan can help you avail of a flexible cash advance. With a maximum loan amount of up to INR 50 lakhs, a repayment term of up to 90 days, flexible interest rates and a revolving loan nature, EFL’s MSME working capital loans are a great way to inject quick capital into your business and keep your operations running smoothly.

Ashutosh P
Ashutosh P

Ashutosh has more than 18 years of experience in commercial banking and SME finance. He heads the branding and marketing for the company and is also the product head for the secured business finance and rooftop solar finance business. Ashutosh boasts over 20 years of extensive experience in the fields of commercial banking and SME finance. Currently, he holds multiple key roles within the organization, including heading the MD's office, overseeing Strategy and Marketing, and serving as the Product Head for the rooftop solar finance division. Additionally, he spearheads various initiatives that have been instrumental in driving the company towards achieving significant impacts in environmental sustainability and financial inclusion.

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