Working capital loans: Are they a good idea?

A working capital loan can give you the financing you need to cover everyday business expenses when revenue is down. Taking out a working capital loan can also be a good idea when you need quick funds to take advantage of new business opportunities.

While there are several types of working capital financing, they generally come with short terms and don’t require any specific collateral. The best working capital loan depends on your priorities. Banks and credit unions tend to offer the lowest rates and fees. But online lenders have more flexible requirements and a faster turnaround.

What is a working capital loan?

A working capital loan is a type of short-term financing that small businesses use to pay for everyday expenses. Also called cashflow loans, this type of financing is meant to cover small, miscellaneous costs rather than finance long-term investments or assets.

Often, a working capital loan is an unsecured loan or a loan backed by a general lien on your business’s assets. However, even unsecured working capital loans typically require a personal guarantee.

For this reason, business financing companies tend to put more weight on your personal credit score than they might with equipment or real estate financing. And while there are options for small business owners with bad credit, these can be highly expensive.

Working capital definition

Working capital is the amount of cash reserves your business has available to cover expenses. You can calculate your business’s working capital by using this formula:

Current assets – Current liabilities = Net working capital

If your business has negative net working capital due to a temporary drop in revenue, you might want to consider a working capital loan. But it’s only a short-term solution. Taking on debt can make a long-term cashflow problem worse.

Pros and cons

A working capital loan can help your small business ride out the off season. But it comes with some drawbacks.

Pros

• Collateral often isn’t required for a working capital loan. And it if it is, there’s usually no one specific asset.
• Working capital loans are fast. In some cases, lenders deposit funds into your business bank account the same day you’re approved.
• Most lenders offer working capital financing, making it easier to shop around for a low rate.
• There’s no restrictions on how you spend the funds — as long as it’s for business expenses. This gives you the flexibility to meet your business’s needs at a moment’s notice.
• Bad credit options are available — as well as cash advances that don’t even consider your personal credit score at all.

Cons

• Good personal credit is required for the lowest rates. While there are options for bad and fair credit scores, they can be highly expensive and might not be worth the cost.
• Short repayment periods can lead to a high monthly payment, which can eat into your business’s budget.
• Weekly and daily repayments are common with working capital financing — especially if you take out a short-term loan or cash advance.
• Unexpected fees and long-term contracts are common with bad credit working capital product, which can lead you to spend more than necessary — and make costs difficult to predict.

Types of working capital loans and how they work

These are the main types of working capital business loans available through banks, online lenders and any other financial institution.

Short-term loans

Short-term loans are one of the most common type of working capital financing. While long-term loans are designed to finance large projects, short-term loans are designed to cover operating costs.

These give you all of the funds at once, which you repay plus interest and fees in monthly or weekly payments. Usually you can borrow from $1,000 to $500,000, with loan terms between six and 36 months. Rates can start at around 4% APR — but can top 90% APR in some cases.

These are best for businesses that only occasionally need working capital. While many lenders offer discounts to repeat customers, it’s not as convenient as a line of credit.

National Funding business loans

4.75 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

National Funding is an online lender that offers working capital loans to most small businesses — with options for bad credit and high risk industries. Its rates are relatively low for an online lender. And its working capital loans come with terms of 12 months or less. But it requires daily payments, which can be difficult for some businesses to manage. And the rates and terms from its partners could be higher than expected.

Pros

• No minimum credit score
• Accepts high-risk industries
• Relatively low rates

Cons

• Daily payments
• Potentially higher rates from partners
• Doesn't disclose costs on website

Loan amount	$5,000 – $500,000
APR	4% to 8%
Min. Credit Score	500
Loan Term	Up to 12 months
Requirements	Be in business at least one year and make at least $150,000 in annual sales. Other loan types have additional requirements.

Loan amount	$5,000 – $500,000
APR	4% to 8%
Min. Credit Score	500

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OnDeck short-term loans

4.6 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

OnDeck's short-term business loans are designed for working capital. With minimal paperwork you can borrow as much as $250,000 with a turnaround as soon as the day you're approved in some cases. OnDeck accepts fair credit and has relatively flexible requirements compared to a bank loan — plus it only requires a lien on business assets. But while it offers reduced fees for repeat borrowers, OnDeck's APRs are some of the highest out there. You can likely find a lower rate with another lender, if you can qualify.

Pros

• Same-day funding available
• Reduced fees for repeat borrowers
• Reports to business credit bureaus

Cons

• High starting APR
• Not all industries can qualify
• Daily or weekly repayments

Loan amount	$5,000 – $250,000
APR	As low as 35%
Min. Credit Score	600
Loan Term	3 to 18 months
Requirements	600+ personal credit score, 1 year in business, $100,000+ annual revenue

Loan amount	$5,000 – $250,000
APR	As low as 35%
Min. Credit Score	600

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Lines of credit

A working capital line of credit gives your company access a credit limit, which your company can draw from as needed to cover short-term business expenses. Usually working capital credit limits stop at around $250,000.

This type of financing comes with slightly higher rates and fees than a term loan. Often, each withdrawal turns into a short-term loan, which you repay in installments over a term of six to 12 months.

These are best for small businesses that frequently need access to cash. But it can also be useful to have on hand to cover emergency expenses.

BlueVine business lines of credit

4.5 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

BlueVine offers working capital lines of credit with the option for same-day funding when you need to make a withdrawal. It has a relatively low starting APR compared to other online lenders. And you can qualify with as little as six months in business and a fair credit score. But each withdrawal turns into a term loan with weekly repayments, and you might run into extra fees if you need same-day funding.

Pros

• No origination, maintenance or draw fees
• Accepts fair credit
• Only requires six months in business

Cons

• Weekly repayments
• Fee for same-day funding
• Potentially high APR

Loan amount	$5,000 – $250,000
APR	Starting at 4.8%
Loan Term	6 to 12 months
Requirements	6+ months in business, $10,000+ in monthly revenue, 600+ credit score

Loan amount	$5,000 – $250,000
APR	Starting at 4.8%
Min. Credit Score	600

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Fundbox lines of credit

4.2 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

Fundbox is one of the few lenders that truly requires no paperwork on its lines of credit. Instead, it connects with your business's accounting software when you apply. There's no fee to make a withdrawal, and startups as new as six months can qualify for this working capital loan. But it charges weekly repayments and has a lower-than-average credit limit. Longer terms also come with higher rates.

Pros

• No paperwork
• No draw fees
• Qualify with just six months in business

Cons

• Lower-than-average credit limits
• Higher fees for longer terms
• Weekly payments

Loan amount	$1,000 – $150,000
APR	Not stated
Loan Term	12 or 24 weeks
Requirements	6 + months in business, $100,000+ in annual revenue, 600+ credit score

Loan amount	$1,000 – $150,000
APR	Not stated
Min. Credit Score	600

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SBA loans

A Small Business Administration (SBA) loan is financing backed by the federal government. You can use most SBA loans for working capital, including the popular SBA 7(a) and Express loan programs. The SBA’s Working Capital CAPLine also offers small businesses financing specifically designed to cover everyday business operations.

SBA loans can run as high as $5 million in many cases. But how big of a loan your business can get depends on your business’s financial health. The application process can also take over a month, and lenders require a minimum personal credit score of 620.

Lendio business loans

4.75 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

Lendio is an online business loan marketplace that can help your small business connect with an SBA lender. Its partners offer SBA 7(a) and Express loans, which your business can use for working capital expenses. Its online platform makes it easier to complete the application and keep track of documents. Plus it has personal funding managers on staff to help you out if you're stuck.

Pros

• SBA 7(a) and Express loans available
• Simplified online application
• Staff can help with application

Cons

• Takes up to two months to fund after approval
• Not a direct lender
• Mixed reviews of customer service

Loan amount	$500 – $5,000,000
APR	Starting at 6%
Loan Term	1 to 25 years
Requirements	Operate business in US or Canada, have a business bank account, 560+ personal credit score

Loan amount	$500 – $5,000,000
APR	Starting at 6%
Min. Credit Score	560

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SmartBiz business loans

4.5 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

SmartBiz is an online connection service that specializes in SBA 7(a) lenders and banks. It also offers packaging services to cut down the turnaround time from months to weeks — for a fee. But it's best for more-established businesses and owners who have good credit. And if you need less than $30,000, another lender is a better choice.

Pros

• Offers packaging services
• SBA and non-SBA loans
• Faster SBA loan turnaround

Cons

• Packaging and referral fees
• Can still take up to 30 days

Loan amount	$30,000 – $5,000,000
APR	4.75% to 7%
Loan Term	10 to 25 years
Requirements	650+ personal credit score, US citizen or permanent resident, 2+ years in business, $50,000+ annual revenue, no outstanding tax liens, no bankruptcies or foreclosures in past 3 years

Loan amount	$30,000 – $5,000,000
APR	4.75% to 7%
Min. Credit Score	650

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Merchant cash advances

Merchant cash advances offer an advance on future credit and debit card sales for consumer-facing businesses. How much you can borrow usually depends on the past three to six months of revenue. And instead of having a loan term, you repay the advance plus a fee with a percentage of your daily sales.

Merchant cash advances are available to businesses in the startup phase and small business owners with bad credit. But it’s one of the most expensive financing options out there, with rates topping 300% APR in some cases.

Fora Financial business loans

4.1 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

Fora Financial offers some of the lowest-cost merchant cash advance out there, with factor rates starting as low as 1.1. It also offers an early payoff discount and doesn't charge a monthly maintenance fee. Businesses that have been around for as little as six months can qualify as long as they have $5,000 in monthly credit card sales and no open bankruptcies. But it doesn't display rates online, and it can take as long as 72 hours to receive your funds.

Pros

• Low cost for a merchant cash advance
• Only six months in business required
• Discount for early payments

Cons

• More expensive than most working capital loans
• Potential 72-hour turnaround

Loan amount	$5,000 – $500,000
APR	Varies
Loan Term	4 to 15 months
Requirements	6+ months in business, $12,000+ monthly revenue, no open bankruptcies

Loan amount	$5,000 – $500,000
APR	Varies
Min. Credit Score	670

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Invoice financing and factoring

Invoice financing and factoring offer an advance on unpaid invoices for business-facing businesses (B2B). Invoice financing allows you to retain control of your accounts receivable as your customers pay them off, and is usually available for smaller amounts — say under $30,000 or $50,000. Invoice factoring involves selling unpaid invoices to a third party at a discount.

This type of business funding doesn’t rely on your credit score or time in business. But, like a merchant cash advance, it’s one of the most expensive financing options available and should be saved as a last resort.

PROMOTED

FundThrough Express business cash advances

4.5 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

FundThrough offers both invoice financing and factoring to B2B companies with at least $50,000 in accounts receivables. It offers an application that's so simple you can apply on your phone and receive the funds within 24 hours. And while its monthly factor fee is average compared to similar companies, there's no long-term commitment. This helps you avoid paying for an advance when you don't need financing.

Pros

• Invoice financing and factoring available
• No long-term contracts
• Simple application

Cons

• Weekly repayments
• May require specific accounting software for fastest turnaround

Loan amount	$500 – $10,000,000
APR	Not applicable
Min. Credit Score	None
Loan Term	Up to 3 months
Requirements	Considers your business’s invoicing and banking history

Loan amount	$500 – $10,000,000
APR	Not applicable

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Microloans

Microloans are are short-term loans from nonprofit lenders. Unlike most financial institutions, microlenders often offer financing to entrepreneurs who need working capital to start a new business. These often don’t require collateral or come with strict credit score minimums.

Usually you can borrow up to $50,000 with terms from six to 12 months. But these can take weeks to fund and rates often start a little higher than an online or bank loan.

Kiva business loans

3.7 / 5 ★★★★★

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• Overview
• Pros & Cons
• More Details

Kiva is a nonprofit that offers crowdfunded microloans of up to $15,000 with a 0% APR. There are no credit or time in business requirements. But to qualify, your business must raise funds from at least five members of your social network over 15 days. After that, most small businesses can receive your funds within 30 days. The long turnaround may be worth the 0% APR in some cases.

Pros

• No interest or fees
• Loans as small as $25

Cons

• Can take up to 45 days
• Relies on social network
• No customer service line

Loan amount	$25 – $15,000
APR	0%
Min. Credit Score	None
Loan Term	1 to 3 years
Requirements	Have members of social network willing to contribute, live in US, ages 18+, not in bankruptcy, not a registered sex offenders or terrorist, not convicted of violent or financial crimes in past five years.

Loan amount	$25 – $15,000
APR	0%

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Working capital loan rates and terms

Interest rates and terms vary depending on the type of working capital loan you get. But here is an example of what you can expect from different types of working capital loans.

How to use the funds

You can use the funds from a working capital loan for almost any operational costs. Small businesses often use this type of business financing to pay bills, pay employees or refinance debt.

Many also use a working capital loan to take advantage of a new business opportunity or prepare for a seasonal increase in sales. For example, businesses often need extra working capital to pay for hiring expenses, inventory and advertising.

How to qualify

Your small business generally needs to meet the following requirements to qualify for a working capital loan.

• At least 12 months in business
• Annual revenue of $100,000 or higher
• Good credit score of at least 670
• Business bank account

You don’t necessarily need to meet all of these requirements to qualify. In fact, there are business financing options for every type of business — including startups and small business owners with bad credit. But you’ll have more of a selection to choose from if you meet these requirements.

How to get working capital financing

You can get a working capital loan by following these steps — though the order can vary depending on the type of business financing.

1. Calculate how much working capital you need by using the working capital formula or estimating how much you need to borrow for a new project.
2. Compare lenders that offer working capital loans, paying attention to the amount of funding available, rates, terms, fees and requirements.
3. Prequalify with your top choices, usually by filling out a form online. If you’re applying with a bank or factoring company, you might have to call to ask for a quote.
4. Fill out the application with your top choice after comparing prequalification offers.
5. Submit any required documents, like recent bank statements, your business balance sheet, accounts receivable and accounts payable.
6. Review and sign your loan offer, taking note of the rates, terms and due date.

Bottom line

A working capital loan can give your business funding to cover operating expenses or grow when your current assets aren’t enough. And there are a variety of business funding options for startups, established firms and all credit types.

But consider another type of business loan if you want to invest in a long-term project or make a large purchase. Compare more options with our guide to the best business loans of 2021.