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Working Capital Loans: What They Are And Where To Find Them

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working capital loan business loan

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!

Want help finding a business loan? Apply now to Merchant Maverick’s Community of Lenders. We’ve partnered with banks, credit unions, and other financiers across the country to bring you fast and easy business financing.

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 AssetsCurrent Liabilities
Cash$2,000Tax payable$4,000
Inventory$5,000Accounts Payable$3,000
Accounts Receivable$3,000Credit 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

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.

SBA 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

Short-term loans (also sometimes called cash flow 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.

Invoice Financing

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 Loans6% – 36% APR• At least one year in business
• At least fair credit
SBA Loans6% – 11% APR• At least 2 years in business
• At least fair credit
• Strong business financials
Lines Of Credit7% – 65% APR• Available to businesses of many sizes and credit scores
Short-Term Loans6% – 99% effective APR• At least 3 months in business
• Consistent cash flow
• Poor credit okay
Invoice Financing1% – 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 Retail 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 two of our favorites:

1. OnDeckOnDeck logo

OnDeck (see our review) is an incredibly popular online lender that was one of the first to use technology for lending decisions — making approval fast. OnDeck also has relaxed borrower qualifications, although the loans can get expensive. Payments are made daily or weekly. OnDeck offers:

  • Short-term loans
  • Lines of credit

To qualify for an OnDeck loan, you must have been in business for twelve months, have a credit score of 600 or higher, and have an annual revenue of $100K.

Here are the rates for OnDeck’s short-term loans:

Borrowing Amount:

$5K - $500K

Term Length:

3 - 36 months

Factor Rate:

x1.003 - x1.04 per month

Origination Fee:

2.5% - 4%

Effective APR:

Learn more


UCC-1 blanket lien, personal guarantee

Borrowing amount:$5K – $500K
Term length:3 – 36 months
Factor rate:x1.003 – x1.04 per month
Origination fee:2.5% – 4%
Effective APR:Learn more
Collateral:UCC-1 blanket lien, personal guarantee

Here are the rates for OnDeck’s lines of credit:

Borrowing amount:$6K – $100K
Draw term length:6 months
Draw fee:None
Maintenance fee:Typically $20/month
APR range:Starts at 13.99%
Collateral:Personal guarantee

While OnDeck can get expensive, its relaxed borrowing requirements make it a good option for merchants looking for fast funding who may not be approved elsewhere, or who need a little extra working capital to hold them over until they qualify for better financing. Read our full review for details about OnDeck’s application process.

Read our full OnDeck review

Visit the OnDeck website

2. StreetShares

StreetShares (see our review) is a peer-to-peer lender that started back in 2013. The company was founded by veterans, for veterans, but you don’t have to be a veteran to use this small business loan service. StreetShares has competitive rates and low borrower qualifications. StreetShares offers:

  • Installment loans
  • Lines of credit
  • Contract financing

To qualify for a StreetShares’ loan, you must have a credit score of 620 or higher, have been in business for a year, and have 25K in annual revenue (if you have $100K in revenue, you can qualify after being in business for only six months). If you’re interested in contract financing, the qualifications are even easier to meet; you just have to be a B2B or B2G business that sends invoices to your customers.

Here are the rates for StreetShare’s installments loans:

Borrowing amount:$2K – $100K
Term length:3 – 36 months
Interest rate:About 6% – 14%
Closing fee:3.95% or 4.95%
APR range:7% –  39.99%

Here are the rates for StreetShare’s lines of credit:

Borrowing amount:$5K – $100K
Draw term length:3 – 36 months
Interest rate:About 6% – 14%
Draw fee:2.95%
APR range:7% –  39.99%

Here are the rates for StreetShare’s contract financing:

Credit facility size:Max $500K per invoice
Advance rate:Up to 90%
Discount rate:Varies
Max overdue account:180 days
Additional fees:None
Contract length:N/A
Monthly minimums/maximums:None
Factor all invoices:No
Recourse or non-recourse:Non-recourse
Notification or non-notification:Notification

StreetShares is one of our top-rated small business lenders for a reason. This lender offers fast, affordable working capital for small to medium-sized businesses and boasts some of the best rates on the market. Learn how to apply in our complete StreetShares review.

Read our full StreetShares review

3. LoanBuilder

Acquired by PayPal in 2017, LoanBuilder offers short-term loans to both PayPal and non-Paypal users. This small business lending service sets itself apart with low borrower requirements and no origination fee.

LoanBuilder offers:

  • Short-term loans

To qualify for lending from LoanBuilder, you must have a credit score of 550 or higher, have been in business for at least nine months, and make a minimum of $42,000 annually.

Here are the rates for LoanBuilder’s short-term loans:

Borrowing Amount:$5,000 – $500,000
Term length:13 -52 weeks
Borrowing Fee:One-time fee of 2.9% – 18.72% of the borrowing amount
Origination fee:None
Effective APR:Learn more
Collateral:UCC-1 blanket lien

Low borrower requirements and competitive rates make LoanBuilder a viable option for businesses looking for a short-term loan. And, unlike many other short-term loan providers, LoanBuilder offers weekly repayments instead of daily repayments.

Read our full LoanBuilder review

Visit the LoanBuilder website

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.

1. Fundation

fundation logo

Founded in 2011, Fundation (see our review) has quickly become one of the top choices for business lending. With competitive rates, excellent customer service, and almost no negative reviews, it’s easy to see why. Fundation offers:

  • Installment loans
  • Lines of credit

The qualifications for Fundation are a bit more stringent than SmartBiz’s. To qualify, you must have a credit score of 660 or higher, have been in business for at least a year, and have $100K/year in revenue. You must also have three full-time employees.

Here are the rates for Fundation’s installment loans:

Borrowing amount:$20K – $500K
Term length:1 – 4 years
Origination fee:Up to 5%
APR:7.99% – 29.99%
Collateral: Personal guarantee, UCC-1 blanket lien

Here are the rates for Fundation’s lines of credit:

Borrowing amount:$20K – $100K
Term length:18 months
Additional fees:$500 closing fee
2% draw fee
APR:7.99% – 29.99%
Collateral: Personal guarantee, UCC-1 blanket lien

Fundation is a great option for established businesses with good credit who are looking for a working capital loan that offers the competitive rates of bank and credit card lenders, without the long, complicated application process. Read our full review to learn more about the product and for details on applying for a foundation loan.

Read our full Fundation review

Visit the Fundation website

2. SmartBizsmartbiz logo

SmartBiz (see our review) has been simplifying the SBA loan process since 2009. SmartBiz does not issue loans themselves; instead, they help pair eligible applicants with an SBA lender. SmartBiz specializes in the General 7(a) Small Business Loan, which can be used for:

  • Working capital
  • Debt refinancing
  • Commercial real estate purchasing

Because SBA loans are government-backed, it can be harder to qualify for these loans. To qualify for a SmartBiz loan, you must have at least fair credit, have been in business for two years, and have enough cash flow to support repayments. You cannot have any tax liens, current charge-offs or settlements, or any bankruptcies in the last three years. You must also be a US citizen or permanent resident.

Here are the rates for working capital and debt refinancing loans:

Borrowing amount:$30K – $350K
Term length:10 years
Interest rate:Prime rate + 3.75% (loans of $30K – $49K)
Prime rate + 2.75% (loans of $50K – $350K)
Other fees:Referral fee: 2%
Packaging fee: 2%
Guarantee fee: 0% – 2.25%
Bank closing costs: ~$450
APR:5.85% – 8.95%
Collateral:Personal guarantee
Lien on business assets

Here are the rates for SmartBiz’s commercial real estate purchasing loans:

Borrowing amount:$500K – $5M
Term length:25 years
Interest rate:Prime rate + 1.5% – 2.75%
Other fees:Referral fee: 0.5%
Packaging fee: 0.5%
Guarantee fee: 2.25% – 2.75%
Bank closing costs: ~$5K
APR:5.85% – 8.95%
Collateral:Personal guarantee
Lien on the real estate

If you’re an established business looking for an SBA loan, SmartBiz loans are much easier to apply for than most SBA loans. This option is not suited for startups. Read our SmartBiz review for the full scoop and to learn more about the SmartBiz application process.

Read our full SmartBiz review

Visit the SmartBiz website

Working Capital Loans For B2B Businesses

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.

1. BlueVine

BlueVine (see our review) was founded in 2013, and this online lender has been revolutionizing invoice factoring ever since. The lender is known for positive customer reviews and plenty of customer support options. BlueVine offers:

  • Invoice factoring
  • Lines of credit

BlueVine has relaxed borrower requirements. To qualify for invoice factoring, you must be a B2B business that’s been operating for three months, have a credit score of 530, and have a yearly revenue of $100K. To qualify for a line of credit, you’ll need to be in business for six months, have a credit score of 600, and have a yearly revenue of $120K (some states are not supported).

Here are the rates for BlueVine’s invoice factoring:

Credit facility size:$20K – $5M
Advance rate:85% – 90%
Discount rate:0.3% – 1% per week
Max overdue account:13 weeks (91 days)
Additional fees:$15 wire transfer fee (no charge for ACH transfers)
Contract length:N/A
Monthly minimums:No
Factor all invoices:No
Recourse or non-recourse:Recourse
Notification or non-notification:Both (see below)

Here are the rates for BlueVine’s lines of credit:

Credit facility size:$6K – $250K
Term length:6 or 12 months
Interest rate:0.3% – 1.5% per week
Draw fee:1.6% – 2.5% per draw
APR:15% – 78%
Personal guarantee:Yes

While BlueVine may not have the cheapest rates, it does have some of the lowest borrowing requirements, making it a good option for young businesses in need of working capital. Check out our full review for more information and to learn how to apply for BlueVine.

Read our full BlueVine review

Visit the BlueVine website

2. Fundbox

Fundbox (see our review) started out in 2013 as an invoice financing provider. Today, Fundbox also offers lines of credits and is known for good customer support and positive customer reviews. Fundbox offers:

  • Invoicing financing
  • Lines of credit

To qualify for Fundbox’s invoice financing, you’ll need to have been using a compatible accounting or invoicing software for at least three months. To qualify for Fundbox’s lines of credit, you’ll need to have had a compatible bank account for at least six months.

Here are the rates for Fundbox’s invoicing financing:

Credit facility size:Up to $100K
Advance rate:100%
Advance fee:0.4% – 0.7% per week
Term length:12 or 24 weeks
Additional fees:None
Contract length:N/A
Monthly minimums:No
Factor all invoices:No
Recourse or non-recourse:Recourse
Notification or non-notification:Non-notification

Here are the rates for a Fundbox’s line of credit:

Borrowing Amount:$1K – $100K
Term Length:12 weeks
Borrowing Fee:0.5% – 0.7% per week
Draw Fee:None
Effective APR:12% – 54%

Fundbox is a great option for young businesses looking for an invoice financing solution or a line of credit for more consistent cash flow. For more information on Fundbox and applying for this funding option, read our complete Fundbox review.

Read our full Fundbox review

Visit the Fundbox website

3. Amex Working Capital

You probably know American Express for its charge cards, but Amex now offers an Amex Working Capital service for existing Amex cardholders. Amex Working Capital has reasonable rates, no origination fee, and the unique ability to defer repayments for the life of the loan.

Amex Working Capital offers:

  • Short-term loans
  • Medium-term loans

To qualify, you must be an American Express cardholder who has been in business for 24 months and has an annual revenue of at least $200,000.

Here are the rates for a working capital loan from American Express:

Credit limit:$1K – $750K
Term length:30, 60, or 90 days
Factor rate/interest rate:0.5 – 5.2%
Origination fee:None

With reasonable fees and the option to defer payments, Amercian Express Working Capital could be a great option for Amex cardholders. You will have to pay the loan back in full by the end, but this unique lending service presents a good cash flow solution for many businesses.

Read our full Amex Working Capital review

Visit the Amex Working Capital website

Final Thoughts

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 a

nd 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 (read our review) 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.

Borrower requirements:
• Free loan aggregation service; requirements vary by area and lender.
Compare offers
Learn more about the Community of Lenders

Best of luck finding the right working capital loan for your business!

Chelsea Krause

Chelsea Krause

Managing Editor - Accounting
Chelsea Krause is a writer who has specialized in accounting for two years and is a QuickBooks Certified User. She has a BA in English & Creative Writing from George Fox University and studied at the University of Oxford as well. She has been quoted in Forbes and her work appears in Startup Nation, Small Business Bonfire, and Women on Business.
Chelsea Krause
Chelsea Krause

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    Person with the score oof 700 that wwas 600 before seveal years is as economically viable.
    Yoou need to know when, why, and just hhow creditors might come as soon as
    you because of past due amounts owed so that you can heop yourself get rrid of
    trouble. Generally an IVA is merely appropriate in situations where thre is a regular
    income and owe monmey to multiple creditors.

      Ellie Davis

      I like that you suggest getting a capital loan if your cash flow is inconsistent. This always seems to be an issue for smaller businesses and I would imagine a capital loan would help fix it. I wonder how much research needs to be done in order to find a good company to help with this loan.

        shahidul islam

        much impressive. I would like to learn more things about working capital loan sanctioning procedure from the point of view as an banker. Your best co-operation always to be appreciated. Thanks a lot.

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