Working capital is the money a business uses to cover its daily expenses like utilities, supplies, payroll, and rent. A working capital loan offers your business a way to temporarily pay for these expenses when your bank account is running low.
You might think that if your business is successful and you manage its finances correctly, you’ll never need a working capital loan. But that’s not necessarily true. Maintaining a balance of cash on hand can be a challenge.
While it’s important to keep some money in reserve, you don’t want your company’s financial safety net to grow too large either. Save too much money (like Scrooge) and you could miss some valuable opportunities to invest in your business and potentially grow.
But what happens when an investment goes wrong or you don’t collect on invoices as quickly as you anticipated? What if your company’s sales cycle is seasonal and you have an unexpected expense come up during a slow income month? When funds are tight and cash flow is low, a working capital loan may help your business cover those everyday operational expenses until your business has a chance to catch up through sales, invoices, investments, or other means.
Or what if you have an opportunity to grow your business that requires cash but you don’t want to drain your business checking account?
A working capital loan can be helpful in all of those situations.
What is a working capital loan?
A working capital loan is money borrowed to pay for day-to-day operations of your business. Working capital loans fund a business’s short-term business needs and expenses rather than longer-term investments or assets.
As mentioned, a working capital loan is a type of small business loan that can help when your company finds itself in a tight financial spot for whatever reason. This form of business funding isn’t used for long-term investments but rather is reserved for short-term financial goals.
Before we review the different types of working capital financing options available, let’s back up and better understand working capital itself—how it’s defined and how it’s calculated.
Working capital
Working capital (also called net working capital) is the difference between your business’s current assets and its current liabilities. Assets may include accounts receivable, inventory, and cash on hand. Liabilities may include accounts payable and any payments due on business debts in the next 12 months.
The Security Exchange Commission describes it this way: “Working capital is the money leftover if a company paid its current liabilities (that is, its debts due within one year of the date of the balance sheet) from its current assets.”
Here’s the formula you need to follow to calculate your business’ working capital:
- Current Assets – Current Liabilities = Working Capital
Let’s illustrate this formula. Your business has $1 million in assets, including cash, accounts receivable, and inventory. It also has $750,000 in liabilities in the form of outstanding accounts payable and other debts.
$1 million — $750,000 = $250,000 in Working Capital
To calculate your business’ working capital ratio, the formula is slightly different:
- Current Assets ÷ Current Liabilities = Working Capital Ratio
So, if you have assets worth $1 million and liabilities totaling $750,000, the working capital ratio of your business is 1.33. According to QuickBooks, your business should aim to have a working capital ratio of 2:1, so in this example, your ratio is a little low and might indicate you don’t have enough of a cushion in your business bank account.
Working capital loans
Cash flow issues can be incredibly stressful for any small business owner. It can, in fact, be the cause for small business failure: 82% of the businesses that fail do so because of poor cash flow management.
And while business credit cards can offer a quick way to pay for an unforeseen expense, they often come with large interest rates. A better option? Working capital financing.
Working capital loans can offer an immediate influx of cash to help your company cover expenses during an emergency or downturn in business. These short-term loans won’t keep you afloat forever, of course, but they can help to stop the bleeding until you’re able to find a more permanent solution to solve your business’ cash flow problems.
How working capital loans work
Your business can use a working capital loan to pay for things like rent, payroll, and paying off debt. If your business has an off season, a working capital loan can keep you afloat during the months your income drops.
Working capital loans provide a quick influx of cash and offer flexible loan terms. They may not require collateral, and you can get approved in a few hours. But the interest rate may be higher than other funding options, so it should be treated as a last option whenever possible. Some working capital loans come from banks, but you’ll usually have to turn to online lenders.
Pros and cons of working capital loans
Pros
- Fast and easy. There’s less paperwork required than traditional loans — the application is usually online. Plus, you can get approval within a few hours.
- Quick cash. If you need money to pay your business expenses quickly, a working capital loan can be that for you.
- Flexible terms. It’s easier to qualify for a working capital loan than many other types of loans, and they don’t always require you to put down collateral to guarantee the loan. If you can’t manage to get any other type of business financing, a working capital loan could provide you with the cash you need.
Cons
- High interest rates. You’ll likely pay more interest on this type of loan than other options, so the overall cost to you as a borrower will be higher.
- Can hurt your credit. If the loan payments are reported to the personal credit bureaus, any missed payments can bring down the owner’s personal credit score.
- You may need to provide collateral. If your credit score is not high enough, you’ll have to provide collateral, like real estate or equipment, to back the loan.
Types of working capital loans
Below are five types of working capital financing options, along with working capital lenders and other companies that offer financing that we recommend.
Working capital short-term loans
Because business capital is generally used for your business’ daily expenses, loans designed to help cover these costs will typically have shorter payback terms. Often these short-term loans, sometimes called cash flow loans, have to be repaid to the lender within one year or less.
They’re generally not meant to cover long-term investments like real estate or pricey equipment purchases, given the fact that they tend to have higher interest rates than business loans designed specifically for equipment or real estate as well as those short repayment periods.
Always review the costs, loan terms, and conditions of any financial product carefully before you fill out an application. You can also sign up with Nav to find options based on your credit and other factors.
Working capital lines of credit
Want the flexibility to be able to borrow only as much money as you need, pay it back as you can, and then borrow from that same source again in the future without the need to fill out a new application? If this type of borrowing freedom appeals to you, you may want to look into opening a line of credit for your business.
A working capital line of credit, also called revolving credit, can give companies access to a constant supply of funds. Even businesses that aren’t experiencing any cash flow problems at all may benefit from having a line of credit in reserve.
Just remember, before you sign up for any type of business financing, lines of credit included, be sure to read the fine print. Working capital lines of credit may come with high interest rates, lower loan amounts, or aggressive payback terms. It all depends upon your credit, the lender, and other business factors.
Merchant cash advances
A merchant cash advance isn’t a bank loan in the traditional sense of the word. It is, however, a way for many businesses to access the working capital they need to make ends meet temporarily.
To be eligible for a merchant cash advance, your business will typically need to accept credit card payments. Why? The cash advance provider will take a portion of your credit card sales, typically each day, until the advance plus interest and fees have been repaid in full.
On the plus side, you can usually get access to funds through a merchant cash advance lender quickly. But that quick access to cash comes at a steep cost. In fact, the APR on merchant cash advances can climb as high as 70% to 200%. Additionally, both your business credit and your personal credit is likely to be reviewed as part of your application for funding.
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Invoice financing
Another form of short-term financing that businesses regularly use to solve cash flow problems is invoice financing. This type of financing may be especially suited to businesses that invoice for their services or goods after they have been provided to customers.
Waiting for customers to pay invoices can create cash flow issues, and invoice financing can help businesses stay afloat in tight financial times.
Essentially, with invoice financing, you borrow against unpaid invoices. Once the invoices are paid, you pay back your loan with interest. Another option is invoice factoring, which involves selling those unpaid invoices to a lender, who will then be responsible for collecting the payments.
SBA loans
If you have good credit—both business and personal—you might be able to qualify for a low-interest rate SBA loan to help you with your working capital needs. Because the loans are guaranteed by the Small Business Administration, they tend to pose less risk to lenders. SBA small business loans are one of the most affordable ways to secure business financing.
However, there are two big catches when it comes to SBA loans. First, you’ll need to qualify for the loan, and there is a fairly extensive list of eligibility requirements. SBA loans require good personal credit, and some loans require the lender to check business credit as well. Additionally, if you need access to funding in a hurry, an SBA loan might not be the right choice. The application process on these loans often takes 60-90 days.
Interested in learning what it takes to actually qualify for a secured or unsecured loan from the SBA? This step-by-step guide may help.
Working capital loans for startups
Startup companies in particular can be vulnerable to cash flow problems, in large part because it often takes a new business some time to start generating sufficient cash flow to cover expenses. Working capital business loans can be a great tool to help startups navigate this challenging time.
However, your funding choices as a startup (and most likely one with little to no credit history) can often be limited. Thankfully, limited doesn’t mean nonexistent.
Business credit cards are a particularly helpful source for financing startups as the credit decision is usually based on the owner’s personal credit and income from all sources, not just the business.
Quick approval loans
Quick approval loans are often made by lenders to verify eligibility. These loan options often require minimum annual revenues or minimum average monthly revenues to qualify, and will require proof of revenues through merchant account statements, business bank statements, or by linking to one of those types of accounts. Credit may not be as important but there often will be a credit check.
Short-term loans
Most loans used for working capital are short-term loans, which means they must be repaid in a few months, or at the most, a couple of years. Business lines of credit are often used as short-term loans. Merchant cash advances, factoring and invoice financing are also short term financing options.
Best working capital loans of 2023
Here are some of our best options for all the different types of working capital loans.
Working capital short-term loans
Online lenders that currently offer short-term business financing:
Short-Term Loan by Kapitus
Kapitus offers short term loans up to $5,000,000 in as little as 24 hours. The process is quick and easy with limited documentation and offers the best prepayment discounts in the industry.
Pros
- Repayment options ranging 6-18 months with fixed rates options
- Competitive discounts for those who payoff early
- Extremely competitive product for higher revenue businesses - retains a higher average funding amount
- Your offers can improve as repayment history continues
Cons
- Longer industry restriction list
- Comes with a wide range of rates and terms.
Funding Amount
Cost
Repayment Terms
Funding Speed
Short-Term Loan by Rapid Finance
Fast access to funding amounts up to $600,000
Pros
- Loan approval within 24 hours
- Repayment terms up to 18 months
- Growth capital up to $600,000.
Cons
- Rates vary based on industry and risk scoring model.
Funding Amount
Cost
Repayment Terms
Funding Speed
Working capital lines of credit
Online loan specialists that offer working capital lines of credit:
Line of Credit by Fundbox
Nav recommends this product as a great solution for newer small businesses looking for a fast application process and access to a flexible LOC product. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Fundbox a breeze. Only answer a few additional questions on their end and you're good to go.
Pros
- 625 minimum personal credit score
- No impact to credit score to apply (soft pull only)
- No draw fees
- Fast approval and funding, with funds available as soon as the next business day
- Use as much as you need, only pay interest on what you use
- Fundbox reports payment activity to all the major commercial credit bureaus via the Small Business Financial Exchange (SBFE), which can help strengthen a business's credit profile.
Cons
- Must have a business checking account with a minimum balance of $500
- May require large weekly payments (0.4% - 0.7% of the original draw amount per week) due to the short repayment duration.
Funding Amount
Cost
Repayment Terms
Funding Speed
Line of Credit by OnDeck
Product Updates: No More Monthly Maintenance Fee! Monthly Payments and Extended Repayment Terms (18 and 24 month terms) NOW AVAILABLE! A line of credit can be a great asset to businesses who need capital on hand- fast. It allows you the flexibility to draw funds when you need it, and you only pay interest on what you use. Once approved, you can draw available funds quickly and easily without having to provide additional documentation.
Pros
- No monthly maintenance fees
- Monthly Payments available and Extended Repayment Terms (12, 18 and 24 months) Minimal paperwork
- As soon as same-day approval and funding sent by next business day
- Transparent pricing
- Use as much as you need, only pay interest on what you use
- Access available funds with one click.
Cons
- Not available in all states.
Funding Amount
Cost
Repayment Terms
Funding Speed
Line of Credit by Rapid Finance
*This balance fee is charged on the total outstanding account balance on a weekly basis. See the Rapid Finance Line of Credit Agreement for additional details about the balance fee.
Pros
- No competitor payoffs required
- Minimum draw amount is just $1,000
- Easy renewal process
- Use as much as you need, only pay interest on what you use.
Cons
- 4% fee for every draw.
Funding Amount
Cost
Repayment Terms
Funding Speed
Merchant cash advances
Here are a few merchant cash advance providers you can consider:
Business Cash Advance by Credibly
Credibly offers flexible repayment plans with fixed rates, based on future receivables. Ideal for seasonal businesses and those with high credit card processing volumes.
Pros
- Fixed payments
- Offers the ability to pre-qualify without affecting your credit.
Cons
- Must have at least $25,000 a month in sales, Max repayment term is 15 months
Funding Amount
Cost
Repayment Terms
Funding Speed
Business Cash Advance by Rapid Finance
A viable option for businesses looking for growth capital up to $600,000. Costs will vary based on your risk profile. This is a good product to get your foot in the door with a lender, with growth opportunities with Rapid Finance’s other products
Pros
- Application is quick and easy
- Receive funds within hours of approval
- No business lien placed
- No application fee
- Can get approved for both a line of credit and term loan and accept both at the same time
- Flexible repayment options.
Cons
- Loan amounts are based on monthly revenue.
Funding Amount
Cost
Repayment Terms
Funding Speed
SBA loans
You can seek out SBA loans from any lender approved by the SBA to make those loans including traditional financial institutions like banks and credit unions
SBA Loan by SmartBiz
For high cost projects with long repayment. No immediate funds needed.
Pros
- APR as low as 11.25% with monthly repayment plans up to 10 years
- Ability to be pre-approved and review terms and conditions before needing to provide a full list of financial documents.
Cons
- Lengthy application process (30-60 days) with lower approval odds
- Requires more documents than other Bank Loan products.
Funding Amount
Cost
Repayment Terms
Funding Speed
Working capital loans for startups
Here are a couple of financing sources that may help your new business’ cash flow during its beginning stages:
How to apply for a working capital loan
Once you’re ready to officially apply for a business working capital loan, it’s wise to first take a look at the condition of your credit reports. As a small business owner, this means you need to check both your business and personal credit reports. Depending upon the financing provider, both could matter.
Understanding your credit is an important (and often overlooked) part of setting your business up for success. Lenders usually have requirements for the credit scores you’ll need to qualify, as well as for how long you’ve been in business, so review those requirements prior to applying to make sure you qualify.
You can check your business and personal credit with Nav.
Working capital loan interest rates
The next step you should complete before you apply for a working capital loan—or any other type of financing—is to understand how much a company is going to charge you to borrow money. In most cases, your credit will factor into the interest rate you are offered. The final interest rates you are offered on a working capital loan can vary based on other factors too, from time in business to your credit scores, to what the lender is willing to offer.
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Working capital loan fees
The interest rate on a loan often isn’t the only cost associated with a loan. Fees are important to consider as well.
Make sure to calculate charges like the origination fee (a fixed amount the lender may add on) and any fees charged during the application process itself when you calculate the cost of financing. Nav’s business loan calculators can help make the process of figuring out how much a loan or cash advance will actually cost you a lot easier.
How does a company increase working capital?
You may want to exhaust all other avenues to increase working capital before deciding to take out financing. Here are a few strategies to consider.
1. Increase prices
The fastest way to make more money is to raise prices. Be sensitive, however, to your existing customers’ comfort levels. Raising prices too much may turn them off and force them to buy from a competitor.
2. Add other streams of revenue
Constantly seek ways to innovate and you might be able to come up with new revenue streams to enhance profitability.
3. Implement late payment penalties
If clients regularly delay paying invoices, consider implementing a late fee on any invoice paid after a set date. This will either get clients to pay on time…or add a little extra cash to your account.
4. Cut down on expenses
A careful analysis of your budget may show areas you can cut back on to free up working capital. Look especially at recurring subscriptions for software or services you no longer use.
Is a working capital loan right for your business?
In the end, only you can determine whether a working capital loan or other financing solution is the right move for your company if none of the above ideas helped. But there are several important questions you should ask yourself as you’re weighing the pros and cons.
1. Are you likely to qualify?
With many types of financing, both your business and personal credit may play a role in your ability to qualify. Checking your credit and researching a lender’s requirements may help you to figure out which types of financing you’re likely to qualify for before you apply. Increasing your business credit score can help you qualify for more types of financing. Nav can also help you find dozens of business financing options.
2. Can you afford the payment?
Your business’ ability to keep up with the repayment terms of a loan (daily, weekly, or monthly) is another critical piece of information you need to consider when you’re deciding whether or not to take out a working capital loan.
If your business takes out a loan that it ultimately can’t afford, you could potentially damage your business and personal credit severely. You and your business could also face negative repercussions for many years such as potential liens, bank levies, and even the loss of personal assets if you’ve put up a personal guarantee for the loan.
Budget in that monthly payment so you prioritize paying off that debt.
3. Will your vendors offer you payment terms?
One often overlooked source of short-term business financing is vendor credit. If you have a good relationship with your vendors, they might be willing to offer you net-30, net-60, or even net-90 day terms on the goods and services your company needs.
These extended payment terms could help immensely with short-term cash flow problems and might even eliminate your need for a short-term loan elsewhere. All you have to do is ask to see if your vendors are willing to extend terms—or try these vendors that offer net-30 terms.
Nav’s verdict: Working capital loans
There’s no question that cash flow problems can be crippling to a business’ success. If your business is struggling month to month to find enough working capital to pay expenses, it might be time to try to figure out how to make some big changes in either your company’s expenses, income, or both. However, if you simply need a one-time, immediate influx of cash to make it through a rough patch, working capital financing could be just what the doctor ordered.
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Frequently asked questions on working capital loans
Can SBA loans be used for working capital?
Most SBA loans can be used for working capital, including the popular 7(a) loans and microloans.
Do you pay interest on a working capital loan?
Typically yes. Very rarely do loans not charge interest. Two exceptions are Kiva.org which offers no-interest, no-fee loans of up to $15,000 in the US, and a 0% intro APR credit card which does not charge interest for a specific period of time (usually 9 – 12 months).
What is the easiest SBA working capital loan to get?
No SBA loan falls under the category of “instant approval.” During the pandemic, the SBA COVID-19 EIDL loan was no doubt the easiest SBA loan borrowers could get, but that program is closed. The approval process for an SBA loan often takes weeks, or even months, though SBA Express loans and SBA Microloans generally will offer somewhat faster approval than other SBA loans.
How long does a capital loan last?
Working capital loans are generally short-term loans that last anywhere from six months to two years. But there is no official repayment period that covers every type of working capital loan.
Why is a working capital loan required?
Your business may never need a working capital loan but if it does, you’ll want to be ready to quickly get the financing you need. That’s why many businesses get a line of credit, so they can have funds available for emergencies or for opportunities that require additional capital.
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Tiffany Verbeck
Digital Marketing Copywriter, Nav
Tiffany Verbeck is a Digital Marketing Copywriter for Nav. She uses the skills she learned from her master’s degree in writing to provide guidance to small businesses trying to navigate the ins-and-outs of financing. Previously, she ran a writing business for three years, and her work has appeared on sites like Business Insider, VaroWorth, and Mission Lane.