Working capital loans are designed to help small businesses access cash to cover operational expenses like making payroll, purchasing inventory or hiring seasonal workers. Common loan types include lines of credit (LOCs), invoice factoring, merchant cash advances and SBA loans.
The best working capital loan depends on your business needs and your financial situation. Banks and credit unions tend to offer the lowest rates and fees. But online fintech lenders have more flexible requirements and faster turnaround. Here’s a closer look at the options.
Our lending experts analyze dozens of business loan providers to narrow down the best working capital options for business owners. We weigh lenders against 12 key metrics:
Application process
Credit score minimums
Customer service reviews
Eligibility requirements
Extra features
Interest rates
Fees
Funding turnaround times
Lender reputation
Minimum and maximum loan amounts
Products offered
Willingness to work with risky industries
We also search for lenders that cater to a range of needs, including those that work with bad credit and newer business owners.
How to compare working capital business loans
Here are the top things to keep in mind when comparing working capital business loans:
Prequalification. Many lenders allow you to prequalify for a loan to see your potential loan amount, rates and repayments before formally applying with a hard credit check. This lets you compare loans without impacting your credit score.
APRs. Short-term working capital loans usually have higher APRs than long-term loans. Compare quotes from multiple lenders to be sure you’re getting the best deal for the type of loan you’re after.
Repayment terms. Working capital loans have varying repayment terms — daily, weekly or monthly. Understanding how often you’ll need to make payments helps ensure you won’t stretch your budget.
Origination and other fees. Depending on the lender and your credit, you may be charged an origination fee up to 10%. Be sure to ask about other fees too, like late fees, monthly administrative fees and prepayment penalties.
Funding times. While working capital loans from online lenders generally have fast funding after approval, SBA loans can take one to two months to fund. Factor this into your loan choice.
Customer support options. Ask about the lender’s support options, which could be important to you when choosing a loan, as well as later, should you want to borrow again or need other assistance.
Customer reviews. Customer reviews on sites like Trustpilot and the Better Business Bureau (BBB) website are a good place to read about past customers’ experiences with a particular lender.
What is a working capital business loan, and how does it work?
Working capital business loans can either be lump sum or funds that you access on an as-needed basis, like a line of credit. These loans typically have short repayment periods ranging from 90 days to 36 months. Some SBA loans, however, can have repayment terms up to 25 years.
Repayments on working capital business loans can be monthly, bi-monthly, weekly or even daily. This means you’ll likely be making higher payments with most working capital loans than with a long-term loan. This makes working capital loans best for operational expenses and to cover cash flow gaps.
If you need to pay for long-term investments like buying commercial real estate or purchasing large equipment, consider a long-term business loan instead.
Pros and cons of working capital business loans
Consider these pros and cons when choosing a working capital business loan.
Pros
Multiple options available for different financing needs
Helps smooth over cash flow during slow periods
Funds to take advantage of new business opportunities
Businesses that need working capital with a longer repayment term
How to qualify for a working capital business loan
Because there are different types of working capital loans, the eligibility criteria will vary depending on the type of loan you’re after. But to qualify, you’ll generally need to meet these requirements:
A minimum of six months to two years in business
A minimum credit score of 500 to 625
At least $3,000 to $15,000 in monthly revenue
No recent bankruptcies
Again, these are general guidelines only. Some options, like invoice factoring, don’t consider your credit score at all. Eligibility is based on the value of your invoices instead.
How to apply for a working capital business loan
Applying for a working capital business loan typically follows these steps:
Determine the financing you need. Choosing the right working capital loan ensures that you’re getting the correct loan type to cover your specific funding needs — for example, to cover cash flow gaps or to hire seasonal workers.
Check your eligibility. This step involves checking your personal and business credit scores, tallying your revenue, verifying your time in business and determining if you have collateral to pledge if you choose a secured loan.
Gather your documentation. These documents typically include bank statements, tax returns and financial statements. You may also need to provide a business plan and personal guarantee if you’re a newer business owner.
Complete the application. Fill out the application and provide the required documents or link to your financial accounts. Be sure to review the application for accuracy before submitting to avoid processing delays.
Wait for approval and funding. Online lenders tend to have fast approval and funding times — which means if you’re approved, you could have a decision and funds in the same day, depending on the loan type.
If you don’t qualify for a working capital loan, or you just want to consider other options, consider these alternatives.
Personal loan. Some lenders may let you use a personal loan for business expenses. Unlike working capital loans, personal loans don’t consider your business’ financials or time in business, which may be ideal for startups.
Business credit card. For ongoing working capital needs, consider a business credit card. Not only can they help build your business credit score, but you can also earn perks like points or cash back on your business expenses.
Home equity loans or HELOCs. If you own a home with at least 20% equity, a home equity loan or HELOC may be a cheaper borrowing option than a personal loan or credit card. But you must keep up on your payments or risk losing your home.
ACH business loan. These types of loans, also called ACH cash flow loans, offer a lump sum of cash in exchange for allowing the lender to deduct payment directly from your business bank account. They’re typically easy to qualify for and offer quick cash.
Rollover for business startups (ROBS). A ROBS is a tax loophole that allows your business to access funds in your retirement account without penalty if it’s the right type of corporation. To qualify, you need at least $50,000 in your account. But you could face heavy fines with a ROBS, so consider hiring a professional if you choose this option.
Grants. For free funding, consider a business grant. These are available through federal and state government agencies, as well as private corporations. But they’re highly competitive, and funding can take months.
Investor financing. For those in promising industries, money from an angel investor can give you the cash you need to get your business idea off the ground. But you give up equity in your company in return.
Crowdfunding. Crowdfunding is not only a popular marketing tool. It’s a smart way to judge interest in your product or service and gain potential customers while you drum up funding for your business.
Where can I find a working capital loan?
Working capital loans are available from online lenders, banks and credit unions. Online lenders tend to offer some of the best business loans with a wider selection of loans, streamlined applications and faster turnaround times than banks. You could be approved in minutes and have funding by the next day, depending on the loan type.
But you may get a more competitive rate with a bank or credit union, especially if you’re already a customer and receive relationship discounts on your loan. And some banks offer a range of merchant services and business accounts, which can help simplify your business finances and taxes.
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What is the Finder Score?
The Finder Score crunches 12+ types of business loans across 35+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.
To provide a Score, we compare like-for-like loans. So if you're comparing the best business loans for startups loans, you can see how each business loan stacks up against other business loans with the same borrower type, rate type and repayment type.
They can be. A working capital loan is a common way to fund short-term needs and can help businesses get through slow periods or jump on new business opportunities. But the loan still needs to be affordable enough to fit into your budget to avoid losing your business or personal assets.
There are working capital options for borrowers with virtually any credit score. For business lines of credit or SBA loans, you'll typically need a credit score of 620 or higher. Merchant cash advance providers or invoice factoring companies often accept lower credit scores.
Prequalification involves answering a series of questions about yourself and your business to determine your eligibility before you formally apply for a loan.
Here are the general steps:
Visit the lender's website and fill out the prequalification form.
Provide information about yourself and your business.
View your loan options and compare offers.
Once you've narrowed your options based on your prequalification offers, you can formally apply for a loan with the lender of your choice.
Lacey Stark is a freelance personal finance writer for Finder, specializing
in banking, loans, investing, estate planning, and more. She has 20
years of experience writing and editing for magazines, newspapers, and
online publications. A word nerd from childhood, Lacey officially got her
start reporting on live sporting events and moved on to cover topics
such as construction, technology, and travel before finding her niche in
personal finance. Originally from New England, she received her
bachelor’s degree from the University of Denver and completed a
postgraduate journalism program at Metropolitan State University also
in Denver. She currently lives in Chicagoland with her dog Chunk and
likes to read and play golf.
See full bio
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