The Difference Between Secured and Unsecured Loans

Topics: Bank, Banks of India, Central bank Pages: 22 (5358 words) Published: March 15, 2009

Working capital loan funds provide your business the cash it needs to keep growing until you can cover all operating expenses out of revenue. Without a working capital loan most businesses are unable to generate enough revenue to stay afloat. These funds provide access to cash which can be used to pay rent or mortgage payments, utilities, marketing expenses, inventory, employees, etc. Obtaining capital through this method can be difficult for many businesses, so it is essential to have good business credit scores established. Building solid business credit scores are the key to obtaining substantial working capital loan funds that can be used to grow your business. Not all types of working capital require business credit history, but it is important to have that in place. Lenders use your business credit scores just like they use personal credit scores when evaluating whether you are worthy of receiving capital. Making sure that your lines of credit help build your credit will put you in the right direction to getting the loans that your business needs to succeed.

Working Capital Loan means a loan whose purpose is to finance everyday operations of a company. A working capital loan is not used to buy long term assets or investments.  Instead it's used to clear up accounts payable, wages, etc.

The Difference between Secured and Unsecured Loans
• Working Capital Loans can be secured or unsecured.
• A secured Working Capital Loan is one that is backed by an asset and/or personal guarantee.

o The asset required can be a house, factory or inventory. They can be fully paid up assets or assets with existing mortgages or loans.

o How much collateral the bank or financial institution will ask for depends very much on their assessment of your ability to pay back the loan.

o The bank may also require personal guarantees from the owners and/or directors. They must be ready and willing to put up their own personal assets to back the loan e.g. family home, shares and stocks. • Lenders give unsecured loans only to borrowers whom they consider to be low or no risk. Start-ups are generally viewed as risky and are unlikely to be granted unsecured loans.

The Common Types of Working Capital Loans
• There are many different types of Working Capital Loans. To complicate matters, different banks use different terms to describe the same type of loan.

• To help you better understand and select the right loan, here are some common types of Working Capital Loans: 1. Overdraft / Line-Of-Credit

o An overdraft allows you to draw funds beyond the available limit of your bank account.

o The maximum amount you can overdraw is your line of credit. The terms and amount depend on the relationship you have with your banker and his/her assessment of your credit worthiness.

o Overdrafts are flexible and simple to operate. You pay interest only on the amount you have overdrawn. However, the interest rate charged is usually 1-2% above the bank's prime rate.

o Suitable for: All businesses and start-ups.
2. Short-Term Loan

o Unlike an overdraft, a short-term loan has a fixed repayment period - usually 12 months - and fixed interest rates.

o You may be asked to put up an asset as collateral for this loan.

o If your track record and relationship with the bank is good, the lender may even be willing to provide you with the loan without collateral.

o Suitable for: All businesses and start-ups.

3. Confirmed Sales Orders or Accounts Receivable
o Loans based on confirmed sales orders or accounts receivable is another way to raise working capital.

▪ If you need to fulfill a sizeable order of goods, but do not have the funds to do so, you may apply for a Working Capital Loan based on the value of the contract or order.

▪ If there is new opportunity round the corner and you need funds to take advantage of it, you may apply for...
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