Unsecured working capital is a term used to describe financial resources that are obtained for use as working capital, without lenders requiring any type of security or collateral in exchange for the funding. Loans of this type make it possible for a business to make use of the additional resources during periods when other sources of working capital such as sales revenue is temporarily reduced. With the aid of a working capital line of credit or loan that is unsecured, the business can continue to meet its day-to-day expenses during this slow period without having to engage in layoffs or other cut backs that could undermine the stability of the operation.
One of the more common approaches to unsecured working capital is the establishment of a credit line that is utilized specifically as a resource for meeting day to day expenses. Typically, this strategy creates a source of unsecured working capital, with the creditor providing the credit line based on the stability of the business and its past credit history. For businesses where sales are somewhat seasonal, an unsecured credit line makes it possible to augment sales and other sources of working capital revenue with the line of credit on an as-needed basis. As sales increase, the company relies less on the credit line and eventually retires the outstanding balance. This strategy allows the company to be ready for the next slow season, since the credit line remains intact and ready for use whenever needed.
Loans are another strategy that may be used to obtain unsecured working capital. Depending on the circumstances, the loan may be a short-term solution, or be structured for repayment over a longer period of time. Unlike the line of credit, a loan provides financial reserves in one lump sum, leaving the business with the responsibility to pace the utilization of those funds to best advantage. In some cases, businesses may choose to go with this option for obtaining unsecured working capital, place the funds from the loan in an interest bearing account, and withdraw them when needed. Doing so makes it possible to earn interest on the balance that in turn offsets the interest charged by the original lender.
There is also the possibility of obtaining unsecured working capital with a process known as factoring. Essentially, working capital factoring involves selling customer invoices for the most recently closed accounting period to a lender. The lender advances a percentage of the face value of those invoices, and receives payments directly from those customers. Once the invoices for the period are cleared, the factoring company remits the remaining value of those invoices to the client, less a small percentage that is retained as a fee for services rendered. While this does allow the company to obtain unsecured working capital immediately, factoring contracts can sometimes be difficult to resolve. In addition, the collection practices of some factoring companies may not be in harmony with the customer ethics of the recipient of that unsecured working capital, a situation that could lead to a loss of customers and a decrease of revenue in the future.