Working Capital Loans: What They Are & Where To Find Them
Working capital — the money used to handle everyday expenses — is essential to any successful business. You must have enough capital on hand to run your daily operations, but you don’t want to leave money just lying around; it’s important to invest money back into growing your business, after all.
For some businesses, simply understanding the working capital equation and cutting back unnecessary expenses are the keys to proper working capital management. For other businesses, working capital loans are the only way to maintain consistent cash flow. In this article, we’ll cover the definition of working capital and working capital loans, talk about common reasons to use working capital, and discuss the different types of working capital loans. We’ll also point you toward some of the top working capital lenders.
What exactly is working capital? What is working capital used for? When should you take out a working capital loan? Which type of working capital business loan is right for you? We’ll answer these questions and more!
Table of Contents
What Is Working Capital?
Working capital is the difference between your current assets and current liabilities and is used to cover everyday business expenses.
- Current Assets: Short-terms assets like cash or any assets that will become cash by the end of the fiscal year, such as inventory or accounts receivable.
- Current Liabilities: Any debts owed by a business that must be paid in the next twelve months, such as short-term loans and accounts payable.
Working capital is important because it is used to measure how much money you have left to run your business after you’ve accounted for all of your short-term liabilities.
To determine your business’s working capital, use this equation:
Current Assets – Current Liabilities = Working Capital
For example, say your business’s current assets and liabilities look something like this:
|Current Assets||Current Liabilities|
|Accounts Receivable||$3,000||Credit Card||$1,000|
In this example, $10,000 – $8,000 = $2,000, so your business would have $2,000 worth of working capital. Now you know what you have to work with.
Positive VS Negative Working Capital
Ideally, your current assets should outweigh your current liabilities, leaving you with a positive number when you complete the working capital equation. If you have positive working capital, you can pay off your business’s debts and still afford to purchase inventory and run other business operations.
If your current liabilities outweigh your current assets, you have negative working capital and may find it difficult to pay your debts, purchase inventory, and run your business. That is where working capital funding comes in. We’ll go over some of our top working capital loan recommendations later in the article.
Working Capital Liquidity
When thinking about working capital, it’s also important to consider your working capital liquidity. According to Investopedia:
Liquidity describes the degree to which an asset or security can quickly become bought or sold… Cash is considered the most liquid asset, while real estate, fine art, and collectibles are relatively illiquid.
Remember, not all of your current assets are in the form of cash. If you go back to our earlier example, we have $10,000 in current assets, but only the $2,000 cash is readily accessible. $5,000 is in inventory, so we won’t get the funds until customers purchase the items, and $3,000 is in accounts receivable, meaning we won’t get the funds until our customers pay their invoices.
It’s important to keep working capital liquidity in mind so that you know how much of your working capital is actually available for you to use.
How Much Working Capital Does Your Business Need?
As you’re considering a working capital loan, you’re also probably asking yourself: how much working capital does my business need?
Ideally, you want enough working capital to cover your business expenses and pay your debts, but you also want to be using your assets to further invest in your business.
The Working Capital Ratio
One way to gauge your business’s efficiency and financial health is by using the working capital ratio. Here is the working capital formula:
Working Capital Ratio = Current Assets / Current Liabilities
Let’s return to our example from earlier, where your company has $10,000 in current assets and $8,000 in current liabilities. 10,000 / 8,000 = 1.25, so your working capital ration is 1.25.
But what does this number mean in terms of financial health?
According to Investopedia, you want a ratio between 1.2 and 2.0. If your working capital ratio is lower than 1.2, it can indicate that you may have difficulty paying your bills and expenses on time. If your working capital ratio is higher than 2.0, you may not be investing in your company or in new growth opportunities as you should.
The working capital equation helps businesses find the sweet spot between paying existing debts and expenses while preparing for future business growth. This equation can also help you figure out how much you should borrow in a working capital loan.
Reasons To Get A Working Capital Loan
Working capital loans (also known as operating capital loans) are used to keep your everyday business operations up and running. Depending on your business and industry, there can be many different working capital needs. Here are some of the most common reasons to get a working capital loan.
1. Inconsistent Cash Flow
If your customers take a long time to pay invoices, or your inventory takes a long time to turn over, your business’s cash flow will suffer. Inconsistent cash flow can make it difficult to pay bills on time and run your business. A working capital loan gives you access to cash when you need it.
2. Seasonal Sales Fluctuations
Working capital loans can come in handy for seasonal businesses that need to pay business expenses while sales are slow. For example, a boat tourism company may take out a working capital loan in the winter to help cover expenses during the offseason.
Seasonal businesses might also use working capital loans to purchase inventory before a holiday rush to prepare for increased sales.
3. Business Growth Spurts
It’s no surprise that startups and young businesses can have difficulty making ends meet. Working capital loans help new businesses cover everyday expenses, pay their employees, hire new employees, and invest in growing and marketing their businesses.
4. New Business Opportunities
Nothing is worse than passing up on a huge business opportunity because you don’t have the funds. A working capital loan can help you purchase new equipment, invest in training, or give you the resources you need to expand your business and take advantage of opportunities when they arise. Working capital loans can also allow you to take on projects that are a good investment in the long run but may not have an immediate payoff.
5. Cash Cushion
If your business doesn’t have much wiggle room for unanticipated expenses, working capital can act as a sort of cash cushion or emergency fund that helps ensure that your business can deal with the unexpected.
Types of Working Capital Loans
Working capital business loans come in many different forms. Which type of loan is right for your business will depend on your needs and financial situation.
In this section, we’ll cover the most common types of working capital loans and compare the eligibility requirements and rates for each, so you can start deciding which type of loan is right for you.
Installment loans (sometimes known as term loans) are issued to borrowers in one lump sum. Borrowers are then expected to pay back the sum, plus interest, in regular, fixed installments.
Installment loans are a great choice for established businesses looking for long-term loans to finance working capital. There are many online or alternative installment lenders that offer quick application processes and competitive rates for working capital terms loans.
The Small Business Administration (SBA) is a government organization that assists businesses in part via a number of loan programs. The most popular is the 7(a) loan, which can be used for many business purposes, including working capital. The SBA guarantees a portion of your loan, so if you don’t have the collateral necessary to get a low-cost loan on your own, a 7(a) loan is a very good option.
Because SBA loans are government-backed, they can be much more difficult to qualify for and the application process is lengthy. Nonetheless, eligible businesses may qualify for a loan with low rates and long-term lengths.
Lines Of Credit
With a line of credit, you are given access to a certain amount of money. You can draw from this line of credit at any time, up to your maximum credit line amount. Often, lines of credit are revolving, meaning as you pay off your debts, you can draw from the funds again.
A working capital line of credit can be a great way to achieve more consistent cash flow. These loans are also helpful for businesses that don’t know how much they need to borrow or that want a cash cushion for unanticipated expenses. In addition, revolving lines of credit ensure that your business has quick access to funds without the need to apply for an additional loan.
Short-term loans (also sometimes called cash flow loans or fixed rate loans) are issued to borrowers in one lump sum and are paid back in regular fixed installments over a short amount of time. Unlike installment loans, short-term loans have fixed fees instead of interest charges.
Short-term business loans for working capital a great option because most working capital business needs are short-term. (You won’t be spending years paying back a loan.) Generally, short-term working capital loans are also easier to qualify for than medium- or long-term loans, making them a good option for young businesses.
You can’t always get your clients to pay invoices in a timely manner, but that doesn’t mean you have to be stuck without funds while waiting for them to pay.
Invoice financing is a catch-all term for invoice factoring and loans in which invoices are used as collateral. Both options allow you to utilize unpaid invoices to access immediate funds for working capital. In other words, if you are a B2B business that struggles with inconsistent cash flow due to slow-paying customers, invoice financing could be beneficial for your business.
Eligibility & Rate Comparison
Working capital loan rates and eligibility vary with every loan provider, but here is an idea of the type of rates and borrower requirements you can expect from each type of working capital loan:
|Alternative Installment Loans||6% – 36% APR||• At least one year in business|
• At least fair credit
|SBA Loans||6% – 11% APR||• At least 2 years in business|
• At least fair credit
• Strong business financials
|Lines Of Credit||7% – 65% APR||• Available to businesses of many sizes and credit scores|
|Short-Term Loans||6% – 99% effective APR||• At least 3 months in business|
• Consistent cash flow
• Poor credit okay
|Invoice Financing||1% – 6% of the invoice value per month||• Must have unpaid invoices|
Questions To Ask Before You Take Out A Working Capital Loan
You should never borrow money lightly. That’s why it’s important to seriously consider your business’s needs and goals before committing to a loan. Ask yourself these questions to determine if a working capital loan is the right solution for your business:
Have I Explored All Other Options?
Before jumping into a loan agreement, you may find other ways to solve your business’s cash flow needs. Try cutting back unnecessary expenses or give customers incentives to pay invoices quickly. You may also be able to identify certain inventory items that don’t sell fast enough or cost too much to keep stocked.
Making changes to the way you conduct business may allow you to smooth out your cash flow without having to take out a loan.
How Will I Use The Money?
Whenever you borrow money, you ought to have a plan. If you take out a working capital loan without a clear idea of how you want to use the money, you’ll be putting your business in a poor financial situation. Evaluate which issues your business is trying to solve (i.e. business expansion, seasonal sales fluctuations, etc.) and carefully consider whether a working capital loan is the best solution for these issues.
Will This Loan Put My Business In a Better Financial Situation?
You don’t just need to know how you’ll use the money, you also need to know that the loan will be ultimately beneficial for your business.
Depending on the fees and repayment schedule, a working capital loan could send your business into a debt spiral. Before getting a working capital loan, make absolutely certain you can afford the repayments. Ask yourself: Do the benefits outweigh the costs of the loan?
Do I Understand The True Cost Of This Loan?
Speaking of costs, before committing to a loan, you need to make sure you understand all of the loan’s rates and fees. Know everything you can about the loan’s interest rate or factor rate, APR, cents on the dollar costs, additional fees, and more, before you sign any contracts. This way, you can be certain you are getting the best deal.
Our free small business loan calculators can help you fully understand the rates and fees associated with a loan.
The Best Loans For Working Capital
Ready to find a working capital loan for your business? Whatever the size and industry, there are quality lenders available to help your business get the financing it needs. Below, we list our favorite lenders for small retail businesses, larger businesses, and B2B businesses.
Working Capital Loans For Small Businesses
If you’re a small retail business looking for consistent cash flow or a solution to seasonal sales fluctuations, there are some great working capital loan for small businesses. Here are three of our favorites:
Through OnDeck, you can receive up to $500,000 to use as working capital for your business. OnDeck offers short- and medium-term loans and lines of credit for qualified borrowers. While borrowing from OnDeck is more expensive than turning to your local bank, the lender has less stringent borrower requirements, a faster time to funding, and rates that are competitive with other alternative lenders.
You can choose a financial product from OnDeck that works best for your business. For projects that have a fast return on investment, consider a short-term loan, which provides you with up to $500,000 that’s repaid over three to 12 months. This is ideal for updates to your business location, funding a marketing campaign, or covering seasonal expenses. OnDeck charges simple interest rates starting at 9% for its short-term loans.
Need a longer time to pay? Consider a long-term loan, which can be repaid over terms of 15 to 36 months with annual interest rates starting at 9.99%. You can receive up to $500,000 for purchasing equipment or inventory or funding your business expansion.
If you want a more flexible financing option for covering gaps in revenue or unexpected expenses, OnDeck offers lines of credit up to $100,000 with APRs starting at 13.99% for qualified borrowers.
OnDeck has low borrower requirements for all of its financial products, providing funds to borrowers with credit scores as low as 600. The application process is fast and easy, so you can get the working capital you need just days after filling out the online application.
Is a poor personal credit score or lack of business credit history preventing you from getting the capital you need for your business? If so, consider applying for a Kabbage line of credit, which gives you access to up to $250,000 based on the performance of your business — not your credit profile.
If you’ve been in business for at least one year and bring in at least $50,000 in annual revenue, you may qualify for a Kabbage line of credit. If approved, you’ll be assigned a set credit limit. You can make one or multiple draws up to and including this credit limit to cover anything from unexpected expenses to hiring new employees or purchasing additional inventory.
With each draw, you’ll have a repayment term of 6, 12, or 18 months. There is a trade-off for the convenience that Kabbage offers in that you’ll pay higher fees than you might find with other lenders. For every month you have a balance, you’ll pay a fee between 1.5% and 10%. If you don’t use your line of credit, you won’t pay a fee. Since this is a type of revolving credit, funds will become available for you to use again as you pay down your balance.
One thing that sets Kabbage apart from other lenders is the Kabbage Card. This card is free for all eligible borrowers and allows you to make purchases on-demand anywhere Visa cards are accepted. Whether you make your purchase online, pay a vendor, or visit a brick and mortar shop, you can use the Kabbage Card to receive instant access to your funds with the same terms and fees as traditional draws.
PayPal has taken away some of the confusion that comes with small business financing through its LoanBuilder product. Not only will you just have to pay a single fixed fee, but you also have the ability to customize your loan to best fit the needs of your business.
PayPal’s LoanBuilder provides small businesses with $5,000 to $500,000 for any business purpose. The LoanBuilder Configurator allows you to adjust the length of your terms and the amount of your loan to find the payment that’s right for you.
Through LoanBuilder, you can repay your loan over 13 to 52 weeks. LoanBuilder doesn’t use confusing interest rates or additional fees when calculating your cost of borrowing. Instead, you’ll pay one flat fee for borrowing with no origination fees or hidden costs. One drawback, though, is that the fee must be paid in full, even if you repay your loan early.
LoanBuilder also works quickly, sending out funds as soon as the next business day if you qualify. If you haven’t been in business long or have credit challenges, don’t worry — qualifying for a LoanBuilder loan is simple. All that is required is at least 9 months in business, annual revenue of at least $42,000, and a personal credit score of 550 or above. You must also be in a qualifying industry. Although most industries can be funded, there are some exceptions, including religious organizations, nonprofits, and businesses that specialize in financial services.
Working Capital Loans For Larger Businesses
If you’re a larger business looking for working capital for business growth opportunities or business expansion needs, you’re in luck. Here are two great options for large businesses in need of working capital.
Fundation offers traditional business funding products with simple terms, no hidden fees, and a fast and easy application process. Fundation can provide you with up to $500,000 for your business through its term loans and lines of credit.
Fundation’s term loans are available in amounts up to $500,000 with repayment terms up to 4 years. These products are great for expenses related to expansion, capital improvements, and equipment purchases.
Fundation’s flexible lines of credit are available up to $150,000 with repayment terms up to 18 months. Lines of credit are best used for working capital and other short-term cash flow needs.
Fundation looks at several metrics when determining whether you qualify for its financial products, the amount you qualify to borrow, and your rates and terms. This includes looking at business revenue, personal and business credit history, time in business, debt-to-income, and other factors.
Fundation offers extremely competitive APRs starting at 7.99%. However, based on creditworthiness, your APR may be as high as 29.99%. Fundation is best for borrowers with solid credit profiles, as the lender requires a credit score of at least 660 to qualify.
If you’re interested in a Small Business Administration loan but the lengthy and often difficult application process has prevented you from taking that next step, SmartBiz can help. Through SmartBiz, you can access low-cost, flexible SBA loans through an easy online process.
For your working capital needs, you can apply for up to $350,000. These funds can be used in a variety of ways to keep your business on track, including purchasing inventory, hiring staff, covering operating expenses, or even refinancing existing business debt. Rates are extremely competitive at the prime rate plus 2.75% to 3.75% — check out current rates via our guide to SBA loan rates. You’ll have up to 10 years to repay your loan.
More established businesses with solid credit profiles may qualify for an SBA loan through SmartBiz. A minimum of 2 years in business, a personal credit score of 650 or above, and sufficient cash flow are required to receive an SBA working capital loan through SmartBiz. You must also have no bankruptcies or foreclosures within the last 3 years, no outstanding tax liens, and no past defaults on government-backed loans to receive a working capital loan.
In addition to its SBA working capital loans, SmartBiz also offers SBA 7(a) commercial real estate loans with borrowing limits up to $5 million and repayment terms up to 25 years. These loans can be used to purchase or improve commercial real estate. SmartBiz also offers bank term loans up to $250,000 with interest rates starting at 6.99% and repayment terms of 2 to 5 years.
Working Capital Loans For Businesses With Unpaid Invoices
If your business suffers from inconsistent cash flow or slow-paying customers, these working capital solutions may be a great choice for your B2B business.
Whether you want to get an advance on your outstanding invoices or need a flexible line of credit, BlueVine has you covered. Through BlueVine, you have three financial options to get the working capital you need: invoice factoring, term loans, and lines of credit.
BlueVine can provide you with up to $5 million for your unpaid invoices through its invoice factoring service. Rates start at 0.25% per week, and you can receive as much as 90% of your unpaid invoice amount in as little as 24 hours.
Qualifying for invoice factoring through BlueVine is easy. You must operate a B2B or B2G business and have qualifying invoices. You must also have a personal credit score of at least 530, annual revenue of at least $100,000, and a time in business of at least 3 months.
If you don’t want to get an advance on your unpaid invoices, you can apply for a term loan up to $250,000. Your loan is repaid through fixed weekly payments for a period of 6 to 12 months. To qualify, your business must be in operations for at least 6 months, you must have at least $100,000 in annual revenue, and your personal credit score should be 600 or above.
BlueVine also offers lines of credit if you want a flexible financing option. Lines of credit up to $250,000 are available to qualifying borrowers. Draws are repaid over 6 or 12 months. As you pay down your balance, funds become available to use again, making this a more flexible option than BlueVine’s other offerings. Minimum requirements for a line of credit are the same as the requirements for a BlueVine term loan.
Put your unpaid invoices to work for you by applying for a line of credit through Fundbox. By connecting your accounting software through Fundbox’s secure platform, you may qualify for a line of credit up to $100,000.
In just minutes, you could have access to the working capital you need. Fundbox makes it easy to apply for a line of credit. Simply enter information about yourself and your business, connect your supported accounting software, and, if approved, instantly access your line of credit.
Weekly payments are made over a period of 12 or 24 weeks. Fees start at 4.66% of the borrowing amount and are based on the performance of your business. One benefit is that you can save money by paying off your balance early, as all remaining fees are waived. If you don’t carry a balance, no payments are required. As you pay down your balance, funds are replenished and become available to use again.
To qualify, you must have a business checking account, at least $50,000 in annual revenue, and at least 2 months of activity in supported accounting software. You may also show at least three months of transactions in your business bank account to qualify if you don’t use accounting software.
Fundbox funds can be used for any business expense and are available to draw as needed up to and including your credit limit. Since approval is based on the performance of your business, Fundbox is a great choice if you have personal credit challenges or a lack of business credit history.
3. American Express Working Capital
If you need to pay your vendors and you’re an American Express Business Card holder, you could qualify for Amex Working Capital. You may be eligible to receive up to $750,000, all without even having to go through a credit check.
One of the benefits of Amex Working Capital is that the company uses existing information about your business to determine if you qualify. This means that no additional credit check is needed. If you qualify, you’ll have access to $1,000 to $750,000 that can be used to pay your vendors.
Once approved, Amex will pay your vendors immediately, and you’ll repay the lender over 30, 60, or 90 days. You’ll be charged a fixed fee of 0.6%, 1.2%, or 1.8%, depending on the length of your repayment terms. There are no prepayment penalties. However, you will have to repay the entire fee regardless of whether you pay your loan off early.
To qualify, you must be an American Express Business Card holder. The company will evaluate the performance of your business to determine if you qualify and, if so, how much money you have access to.
This option is a great way to pay your vendors off over time. However, if you need access to a more flexible financing option, consider choosing one of the lines of credits or loans previously mentioned in this post.
Working capital is one of the keys to running a smooth business operation. Often, it’s possible to maintain a consistent cash flow just by making smart tweaks to your business model and keeping an eye on your assets and liabilities, but there are times when you may need assistance raising working capital. Whether you’re looking for a solution to seasonal sales, inconsistent cash flow, or business expansion, there are many working capital products that can help you successfully manage your business.
For more information about working capital lenders, check out our comprehensive business loan reviews. If you want to learn even more about small business loans, check out our Beginner’s Guide To Small Business Loans.
To evaluate multiple low-interest lenders at once, you can try using a free loan matchmaking service, often called a “loan aggregator.”
Merchant Maverick has partnered with Lendio to offer one such service: the Merchant Maverick Community of Lenders. By filling out one application, you can be matched to multiple potential lenders. Check your eligibility below.
• Free loan aggregation service; requirements vary by area and lender.
Learn more about the Community of Lenders
Best of luck finding the right working capital loan for your business!