Loans to cover your day-to-day business expenses when cash is short during the off season.
OnDeck Small Business Loans
Among the largest online business lenders offering term loans and lines of credit at competitive fixed rates.
- Minimum Amount: $5,000
- Maximum Amount: $500,000
- Loan Term: 3 to 36 months
- Simple online application process with fast decisions
- Dedicated loan specialists and loyalty benefits
- Must have been in business for at least one year with annual revenue of $100,000+
- Must have a personal credit score of 500+
What is a working capital loan?
A working capital loan is a business loan used to cover the day-to-day expenses of a business, rather than long-term purchases like equipment or real estate. Business owners often use working capital loans to buy inventory, cover payroll or get an advance on unpaid invoices.
Working capital loans can be particularly helpful to seasonal businesses while profits are low. They typically come in smaller amounts than traditional business loans, have shorter terms and are easier for a small business to qualify for.
Working capital loans can include:
- Merchant cash advances. Basically an advance on a business’s future sales. Businesses receive a lump sum, which they repay with a percentage of each sale (usually credit card sale) until they’ve paid off their loan.
- Invoice financing. An advance on a business’s unpaid invoices, which the business repays as customers pay off invoices, plus a fee — usually around 3% of each invoice’s value.
- Invoice factoring. A one-time deal where businesses sell unpaid invoices to a third party at a slightly lower value than they’re worth — typically around 85% to 90%.
- Short-term business loans. Fixed-term loans available in smaller amounts than your typical business loan — usually starting at around $2,000 rather than $25,000. You usually have six months to a few years to pay it off.
- SBA loans. Small businesses can use these low-interest government-backed loans to cover daily expenses, if they can prove they have trouble qualifying for traditional loans and meet the Small Business Administration (SBA)’s other extensive eligibility requirements.
What exactly is working capital?
Working capital is the amount of money a business has access to for short-term business needs. To calculate your business’s working capital, add up all of its liquid assets —such as cash and accounts receivables — and subtract its liabilities — debts.
Working capital = money your business has access to (or is owed) – its debts
A business with a positive working capital can generally afford to take on more debts, has a financial cushion in case of emergencies and often earns more than it spends — though it might not always have access to that cash. Businesses with negative working capital might want to reconsider taking out a new loan and turn to alternatives like crowdfunding or find investors.
5 best working capital loans
| Provider | Good for… | Amounts available | Requirements | |
|---|---|---|---|---|
| OnDeck | Financing a business with a large, consistent cash flow. | $5,000–$500,000 | Must have been in business for at least one year with annual revenue of $100K+. Must have a personal credit score of 500+. | Go to site Learn more |
| SmartBiz | Low-interest SBA loans in larger amounts. | $30,000–$5,000,000 | Personal credit score of 650+; US citizen or permanent resident; Business must be 2+ years old; Annual revenue of $50,000+; No outstanding tax liens; No bankruptcies or foreclosures in past 3 years. | Go to site Learn more |
| Lendio | Cutting down on time spent making comparisons. | $500–$5,000,000 | Must be 18+ and operate a business in the US or Canada. | Learn more |
| Fundbox | Small unpaid invoices. | $100–$100,000 | You must have an established business with regular monthly revenue. | Learn more |
| BlueVine | Large unpaid invoices. | $20,000–$2,500,000 | Must be in business at least 3+ months, have a personal credit score of at least 530, and have a monthly revenue of $10,000 or more. | Learn more |
Why might I consider a working capital loan for my business?
- Can help seasonal businesses stay afloat. You know your business will start to make enough in a few months to start turning a profit, but that can’t help you with your expenses today. A working capital loan can help keep you from folding during the off season.
- Available in small amounts. Small businesses typically don’t need hundreds of thousands of dollars to cover daily expenses. working capital loans can give your business the exact amount of funding it needs.
- Easy for small businesses to qualify. Small businesses can sometimes have trouble meeting revenue requirements that come with larger-dollar loans. That’s not as much of a problem with working capital loans, which are typically smaller.
- Quick funding. Depending on your lender, you can get financing as fast as the next business day.
- You typically don’t need collateral from your business. Most working capital loans don’t require you to put anything on the line that your lender can seize if you fail to pay it back. The drawback of unsecured loans is that they often have higher interest rates than those secured with collateral.
What are the disadvantages of taking out a working capital loan?
- It likely can’t fix a failing business. Businesses that have persistent financial problems might want to look into other options before taking on more debt. If you’ve had a steady downward trend in your business’s revenue, taking out a loan could make the situation worse.
- Potentially high rates. Many working capital loans are short term and come in smaller amounts than your standard business-term loan. They also have more relaxed eligibility requirements and don’t require collateral. In other words, they’re not hugely profitable for lenders and might not be worth the risk unless they charge higher rates. And high rates means your loan will cost more.
- It often needs to be repaid quickly. Aside from coming with higher rates, it can sometimes be difficult for businesses to afford repaying a working capital loan if profits take a brief dive. Some working capital loans come with weekly or even daily repayments, which can also make repayment tough if you have a bad day or week.
- Your personal credit counts. Lenders often consider a business owner’s credit score and history when they apply for a working capital loan. They sometimes require business owners to put a lien on their personal assets in case the business can’t afford to pay back the loan.
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How to make the most of a working capital loan
- Have a method for spending. Consider first paying off your immediate expenses, like utility bills, rent and debt repayments before using it for less-urgent but still important purchases like expanding your inventory or technology upgrades.
- Spend at strategic times. Try to avoid draining your business’s account before a repayment is due to avoid late or nonsufficient funds fees.
- Set up autopay. Most lenders require borrowers to use autopay and some give a discounted rate for autopay borrowers — typically around 0.25%.
- Repay your loan early. One of the best ways to save on the cost of your loan is to repay it as quickly as possible as long as there’s no prepayment penalty. Contact your lender to learn more about its prepayment policy.
Quick tip: Know your business's cash flow
Cash flow is the money moving in and out of your business each month. It’s one of the most important parts of your business’s working capital when deciding if your business can benefit from a working capital loan. Like with working capital, a positive cash flow means that your business is making more money than it spends each month. A negative cash flow means it spends more than it makes.Having a positive cash flow is essential to covering expenses and debt obligations. If you consistently have a negative cash flow, your business might not be able to afford to make loan repayments. It could also have a difficult time qualifying for a working capital loan or other types of credit.
Bottom line
Working capital loans can be a big help to small businesses that have money coming in but could use some extra cash to maintain daily operations. It can be especially helpful for seasonal businesses that need a little help making it through slower months. But if you’re looking to finance a big project or add a location, you might want to check out other business loans like equipment loans, commercial loans for real estate or other business term loans.
Not sure if a working capital loan is right for you? Check out our business loans guide as a starting point.
