Working Capital Loans: Secured vs. Unsecured

Working capital loans provide you with the cash to continue to operate your business regardless of your current sales. These types of loans help you stay afloat in weak economies or seasonal downturns in your business cycle. You will be able to gain the liquidity necessary to meet day-to-day expenses until you can bring in more revenue. Deciding on the right type of working capital loan will save you money over time.

Working Capital Loan vs. Other Funding Sources

Working capital loans are very similar to operating lines of credit. Operating line, though, refers to a specific type of revolving credit you can access whenever you need and pay off or carry a balance on. Operating lines are like credit cards, but you can obtain cash for purchases rather than use the line directly for the purchase. Bridge loans are another type of short-term commercial finance that allow you to make necessary purchases until more permanent financing can be arranged. 

Unsecured vs. Secured Business Loans

An unsecured loan uses no collateral while a secured loan is made based on the value of a property or asset placed as collateral. With an unsecured business loan, you will not have an asset seizes in case of default. You will typically have higher interest rates because the lender is assuming more of the risk. Anytime a lender assumes more risk, the loan will be more expensive for the borrower. Getting a secured loan against an asset means that asset will be seized by the lender if your venture fails. Small business loans use homes, cars and other businesses as collateral. You will have a much lower interest rate with a secured business loan because you are assuming full responsibility for the risk of the loan.

Which Type Is Best?

Determining which type of loan is best truly depends on your particular situation. Unsecured loans may be the only option if you do not have assets large enough to obtain the financing you need. If this is a risky venture, an unsecured loan may be the better option in order to avoid losing an asset you have already built and paid off. New businesses organized as partnerships may lean toward unsecured loans. Neither partner is willing to place a personal asset to secure financing and assume 100% of the risk of the venture. If both partners are willing to contribute an asset of equal value, a secured loan may be an option for a partnership.

Ultimately, an unsecured loan will end up costing the business a large chunk of its profit. A secured loan is the best option if you have an asset worth enough to arrange financing. You should only seek a secured loan if you have reason to believe you will not default on the loan, however, or if you are 100% willing to lose the asset in order to take the risk for this new venture. If you are ultimately not willing to forfeit your asset, then do not opt for a secured loan.