Celtic Bank Blog

Common Myths and Misunderstandings About Working Capital Loans

 

As the popularity and accessibility of working capital loans continues to rise, so do the number of myths and misconceptions about them. Unfortunately, some of these myths not only confuse small business owners, but deter borrowers from taking advantage of these loans.

We’re going to take a more in-depth look at a few of the most prevalent myths out there, where they came from, and the truth behind them (if any). 

 

MYTH 1: WORKING CAPITAL LOANS KILL YOUR CREDIT

 

Because large amounts of debt can be a red flag on your credit, some people shy away from taking out a working capital loan. And while it’s true that credit companies do evaluate your debt, they’re not just looking at how much debt you have. They’re looking at your debt-to-credit ratio. How much debt do you have compared to your credit limits? And how do you handle it? Do you make your payments on-time, or even early? Are you able to pay off your debt within a reasonable amount of time?

Short-term loans, like working capital loans, allow you to demonstrate your ability to borrow responsibly and repay the loan in a timely manner. These good debt handling practices can actually help boost your credit.

 

MYTH 2: WORKING CAPITAL LOANS CAN'T BE PERSONALIZED TO FIT YOUR NEEDS

 

Think back to all the uses of working capital loans listed in our previous post. And all the different types of loans. You can practically debunk this myth yourself!

There are low and high interest loans, loans with and without collateral, and short-or-long term repayment options. Plus, working capital loans are available in amounts of (depending on the lender) anywhere between a few thousand dollars to $350K.

Whatever it is you’re trying to accomplish, and whatever resources you have available, the chances are good that you’ll be able to find a working capital loan that meets your needs.

 

MYTH 3: LOANS ARE ONLY AVAILABLE IF YOU HAVE PERFECT CREDIT

 

When it comes to getting a loan, good credit is helpful. But it’s not the end-all. Offering up collateral can better your chances of getting a loan, or you may be able to secure a loan with a slightly higher interest rate that compensates for your less-than-perfect credit. And with some companies, they take other things into consideration along with your credit--like years in business, annual revenue, and other assets.

 

MYTH 4: LOANS ARE A LAST-RESORT OPTION FOR STRUGGLING BUSINESSES

 

While it is common for businesses to turn to loans during times of financial hardship, loans can also be used by thriving businesses to facilitate growth. For example:

Let’s say Jonathan owns a local screen-printing company. Business is growing, and he’s keeping busy as the primary provider of all the club, class, and team shirts for a few of the nearby high schools. In order to keep up with the growing demand, he decides to take out a small working capital loan to purchase an additional press—and hire another employee to help around the shop. With the new equipment and help, Jonathan is able to start accepting business from the elementary and middle schools in town as well, almost doubling his business within the first two years. By the end of year three, his profits from the growth outnumber the total cost he spent on the loan.

And that’s not the end of it. In addition to updating equipment, using a working capital loan to do things like take advantage of supplier discounts, renovate a facility, or even just build your business cash cushion can help grow and strengthen your already-healthy business.

 

MYTH 5: LOANS ARE TOO EXPENSIVE!

 

True—some loan providers lend money at astronomical interest rates. But you can find affordable loan options, too.

SBA loans, for example, are a popular option for many small business owners because they have some of the lowest rates in the industry, and since they’re largely backed by the SBA, their approval rates are great, too!

With any loan option, good credit scores can help keep your interest in check. Adding collateral or a lien to your loan will help lower costs as well.

At the end of the day—even if the loan is expensive—what it comes to is this: will the gains will be worth the cost? Get a total cost quote from your loan officer, and compare it to the expected profits and gains you see coming from using this loan. Be conservative in your profit estimate. And if the benefits outweigh the cost, then it may be worth the price you’ll pay.

 

CONCLUSION

 

Working capital loans can be a great option for those looking to help or grow their business—regardless of what else you may have heard. Do your research and find the right loan and lender, and you’ll be able to reap the benefits of fast and flexible funding.

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