Difference between Secured and Unsecured Working Capital Options

Working capital options can be both secured as well as unsecured. If your working capital loan is given to you against an asset as a security or a personal guarantee, it is known as a secured working capital loan. The asset can be a house, an office or an inventory. It does not matter if these assets are fully paid up or if they have an outstanding loan amount to be paid. The bank or the financial institution asks for the amount of assets based on their decision about your ability to repay the loan. Some times for secured working capital loans, the lenders can also ask for personal guarantees where the borrower must be ready to put up their own personal assets like their own home, shares and stock certificates.

Secured loans are normally given a green signal by the lenders because of the collateral factor. The borrower also stands to get the best rates as far as interest is concerned. Additionally the repayment terms are easy and flexible in case of secured working capital loans. Secured loans are an excellent resource for businesses and are fairly easy to obtain when a business is in need of working capital.

Unsecured working capital loans are only given to borrowers who are considered low or zero risk. Start-up businesses are quite risky and are mostly refrained from being granted an unsecured loan. As there is no collateral to back up the repayment of an unsecured loan, the risk involved is on the higher side. The loan providers charge a higher rate of interest in order to balance the risk factor. An unsecured loan does not guarantee that the assets will be spared in the case of non-payment of the amount to the lender. However, the loan provider will not be able to stake a claim for the liquidation of assets directly. He will have to take the legal course to recover the unpaid amount. It is an expensive and time consuming method. Furthermore, unsecured loans have to be repaid only after the secured loans are repaid. 

The Questions Lenders Ask Before Granting Working Capital Options.

1. Is your business capable of generating enough money to pay off the interest on the loan?

2. What is the history of the business? How well has the business been performing for the past few years? Most banks will find you a good prospect to grant you the working capital loan if your business has done well in the past. You will be required to prove the previous stability of your company if you are looking to get a working capital loan.

3. In case the business does not do well, how do you plan to repay the loan amount and the interest? It is a good idea if you have a solid answer to this question before it is posed: if your answer is sound, you are more likely to get to working capital loan.

4. What is the background of the managers and how dedicated are they to the business? Are they good enough to steer the business properly even when there are obstacles?

5. How are the sales growing in terms of volume? What is the growth rate of the sales and what are the future plans of expansion as far as sales are concerned?

6. How profitable is the business? This is a very important question for your lenders because if you make money, only then can they recover their money.

7. Who are the competitors for your business? How do you plan to gear up for potential competition? A lender is going to want to know that your business looks promising in the future before they give you working capital loans. If you can prove that you understand the need for a competitive edge, the lender may be more willing to supply you with funding.

8. Is the industry growing and mushrooming well? It makes sense for the lending company to offer working capital loans to a company which is a part of a profit making industry.

9. Is the cash flow smooth? Are you able to pay your employees on time and are you able to pay your bills promptly? Are you in a position to keep the cash momentum going on most of the time?

10. How is your past credit history? Have you been prompt with your payments for the previous loans taken by you? A positive credit history and a good payment history will work toward proving you are worthy of a working capital loan.