Working capital loans offer your business the opportunity to get cash in hand so you can plot out expansions or other operational expenses well into the future with confidence. There are as many ways to use them as there are opportunities for your company, but like any form of financing, understanding their advantages and selecting the right time to take out a loan is essential to getting the best return on the cost of the loan capital.

Term loans for working capital are not always the best choice, but when you have the right combination of income and resources, they often are. That is because term loans can be secured with collateral to lower their costs.

Bigger Loans and Lower Costs

Unsecured debt is a big risk to the lender because there is no definitive recourse that guarantees lenders can recoup debt unless the collateral is involved. Using a real estate asset or heavy equipment as the basis for financing can cut the interest rate by as much as half while also increasing the maximum loan amount. The bigger the asset you finance, the more working capital you can usually get in a single loan.

Nothing says you have to finance for the maximum amount of equity in an asset, either. Keeping interest rates minimized by asking for a lower LTV than the lender’s maximum is an art, and it can save you a lot of money if you develop a keen understanding of how much capital you actually need.

Refinance When You Need Another Loan

Term loans are predictable, so you can tell how long they will take to pay off with confidence. Most lenders allow you to prepay the loan to save money and get out of it sooner, but if that does not work out, you still have options. If your loan amortizes, you can count on being able to refinance the same asset for additional working capital if you need to do so.

If your loan comes with a principal payoff at the end, refinancing it to pay down that principal while gaining access to any additional equity that has built up from rising market values is also an option. Of course, for that to work you need to be financing with an asset that does appreciate in value like commercial real estate. Choose your payoff structure carefully, because there are advantages to both interest-only term payments and loans that amortize over their terms.