Want to learn more about loan capital and how a company can benefit from it? You couldn’t have landed at a better place. This article also sheds light on the pros and cons of working loan capital.
The definition of loan capital is simple: a loan offered from a lender to a borrower that must be repaid. Loan capital is the amount of capital raised from borrowing rather than shares and must be repaid. Available in the form of bank overdrafts, debentures, and bank loans, loan capital is usually secured on business assets and the personal assets of the owner.
Debentures – Amongst the various types of loan capital, debentures are considered the safest as they encourage long-term funding and are usually provided at fixed interest rates by the lender.
Overdraft – is the line of credit offered from a lending institution and granted when the balance in a bank account drops to zero.
Bank Loan – A bank loan is when a bank lends money to consumers for a certain time period, usually at collateral security. In other words, the banks grant money to businesses by taking something valuable as collateral from them.
When it comes to liquidation, keep in mind that loans are prioritized over equity. Loan capital is considered when businesses require funds for a longer period of time. It includes money that is spent to generate revenue, taxes, employee payrolls, and other necessary day-to-day expenses. There’s no denying that loan capital is most commonly used by start-ups as they don’t have enough money to start operating. However, it is crucial to any business, regardless of its size.
It’s also not uncommon for profitable businesses to hit a low and require urgent funds to move forward. Let’s take a look at the advantages and disadvantages of loan capital to help you gain more insights regarding loan capital.
The advantages and disadvantages of loan capital
Before going through the pros and cons, keep in mind that the benefits and drawbacks of loan capital are the pros and cons of obtaining working capital.
With capital loan, you will have instant money for emergencies
Even the most successful companies can find themselves having a hard time clearing employee payrolls and pay day to day bills. A loan capital ensures that a business has cash in hand to deal with any cash flow problems.
A common and effective tool for expansion
As we said earlier, it’s not just startups that are in need of a capital loan. Sometimes, it is used as a tool to expand a business as well. Whether you want to increase the number of outlets your business owns or hire more talent to meet your targets, a capital loan is a great of taking your company’s growth to the next level.
You can borrow money and repay quickly
One of the biggest advantages of loan capital is that they don’t require a company to budget for repayments. It provides a quick fund to ensure that the business goes back to normal operation.
Allows you to spend the money however you want
With loan capital, you have the flexibility to spend the money however you want, because it is structured as a type of debt and not as a form of equity. Investors put on very few restrictions on how they want the company to use the money. They only expect the company’s growth and success.
Increase your net assets
As bank loans are a long-term source of finance, you can expect an increase in your net assets and the net worth of your company.
Allows you to keep full ownership of your company
Loan capital provides you with the funds that your business needs without asking you to transfer the ownership of the assets. In simpler words, it doesn’t give any ownership rights to the lenders.
The drawbacks of working capital loans
Have to repay the loan
It may sound obvious, but you have to pay back the loan even if you were not able to do grow your business as much as you expected to. It’s also important to keep to the repayment that you agreed to before taking the funds from the lender. Some loans have a short repayment time, especially the ones that aim to get out of a temporary financial problem.
High interest rates
You may be charged high interest if you go for unsecured loans or you have bad credit. It also depends on the lender, you are borrowing money from. Some companies might offer favorable interest rates, regardless of your financial condition, while some may charge high-interest rates.
You may have to pay back the loan quickly
Short-term loans require quicker payback. Working capital loans are geared for short time financing, so there’s a chance that the lender might require quick repayments. Moreover, the repayments are larger than that of a long-term loan, and the interest rates are usually high too. It’s also important to keep in mind that you can also lose your assets if you don’t pay them back on time.
Your credit rating might get compromised
The credit rating of a company can get negatively affected if it fails to meet the requirement of the loan. Moreover, every loan that you take is noted on your credit history, which means the more loans you take, the higher the risk you are exposed to.
A Final Word
Loan capital is a form of funding that comprises stock, loans, and bonds, that must be paid back to the lenders.
Whether you are having a hard time paying daily operating expenses or are aiming to expand your business and reach new heights of success, loan capital can help you get out of the financial obstacles that your company might be facing.