A working capital loan is a loan that has the purpose of financing the everyday operations of a company. Working capital loans are not used to buy long-term assets or investments and are instead used to cover accounts payable, wages, etc. Companies that have high seasonality or cyclical sales cycles usually rely on working capital loans to help with periods of reduced business activity.

The immediate benefit of a working capital loan is that it's quick and lets business owners efficiently cover any gaps in working capital expenditures. In addition to the speed, the other noticeable benefit is that it's debt financing and does not require an equity transaction, meaning that a business owner maintains full control of his company, even if the financing need is dire.

Some working capital loans are unsecured. If this is the case, it means that a company is not required to put down any collateral to secure the loan. However, only companies or business owners with a high credit rating are eligible for an unsecured loan. Businesses with little to no credit have to securitize the loan.

A collateralized working capital loan that needs asset collateral can be a drawback to the loan process. However, there are other potential drawbacks to this type of working capital loan. Interest rates are high to compensate the lending institution for risk. Further, working capital loans are often tied to a business owner's personal credit, and any missed payments or defaults will hurt his credit score.

The main problem with a working capital loan is that you need collateral – and for many small business owners, this isn’t an option. Instead of putting your home up at the risk of losing your business, you need to look for other funding options. And one of the best for any small business is a merchant cash advance.

A merchant cash advance allows you a line of credit – without the collateral. A merchant cash advance from a merchant account provider, like First American Merchant, is a simple process, even for those with poor credit. You simply apply with merchant account records, and your needs, and your application is approved in as little as two business days. Payments are made when you make a profit – so no worries about losing your home, or your hair from stressing over it. 

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