How to apply for a working capital loan

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Edited by

Rob Watts

Published on October 29, 2024 | 7 min read

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Key takeaways

There are many types of working capital loans to consider, including term loans, SBA loans, business lines of credit, business credit cards, invoice financing and merchant cash advances
When deciding on a loan, consider the loan’s fees, interest rate, terms of repayment and the lender’s eligibility requirements
Before applying, gather information like business financial statements and formation documents and set up a realistic repayment strategy

A working capital loan is a small business loan that provides short-term funding for businesses that need cash to increase their working capital, the amount of money on hand for operating costs. Types of short-term working capital loans include lines of credit, term loans, invoice financing and Small Business Administration (SBA) loans.

Knowing what you need to apply for a working capital loan, how to decide which type is best and how to compare lending options can help you get the most favorable repayment terms. The following tips will help you choose the best working capital loan.

Know your credit score and report

Before you apply for a working capital loan, you should understand your credit score and how to review your credit report. Depending on the business loan you apply for, your personal or business credit will determine your eligibility and loan terms.

Personal credit

Your personal credit history is what lenders use to determine your ability to repay your debts. A personal credit score is a number between 300 and 850. The higher the number, the better your creditworthiness, which can help you qualify for more loans with better repayment terms.

You can use your personal credit to apply for open credit, like a cell phone plan, revolving credit on a credit card or installment credit, which can be student loans, a mortgage or a personal loan.

Many lenders will use your personal credit score for business credit, especially if your business is structured as a sole proprietorship or you’re a new business and don’t yet have a business credit score.

Business credit

Like personal credit, your business credit score shows the creditworthiness of your business and how well it can repay its debts. Popular business credit bureaus like Dun & Bradstreet and Experian have business credit scores that range from 1 to 100, while the FICO Small Business Scoring Service (SBSS) uses a scoring range of 0 to 300.

Business credit scores and reports are made up of several factors:

Credit history age
Payment history
Debt size and usage
Industry risk
Company size

Decide what type of working capital loan

Once you know where you stand financially, you’ll need to choose a type of working capital loan that best meets your short-term funding needs. There are many types of working capital loans to consider. Be sure to weigh the pros and cons of each type.

Loan type	Pros	Cons
Short-term loan	Lump sum payment Pay off your loan quickly	Frequent payments High payment amounts Expensive interest rates compared to long-term loans
SBA loans	Backed by the U.S. Small Business Administration (SBA) to increase accessibility Lower interest rates and fees Significant funding amounts	Extensive application process Stringent qualification criteria Extended funding time
Lines of credit	Access to a predetermined credit limit to draw from as needed Interest only paid on what you borrow	Short repayment terms Loan amounts lower than term loans
Business credit card	Flexibility to use money when and how you need it, up to your credit limit Aids in tracking and overseeing your company’s expenses	Good to excellent credit typically required Business owner may be personally liable for unpaid debt
Invoice financing/factoring	Quick cash from your unpaid invoices Easily accessible	High fees make it expensive Depends on your customer’s repayment habits
Merchant cash advance	High odds of approval Collateral not required	Frequent payments, often daily or weekly Uses factor rates to calculate interest, which can be expensive

Figure out how much loan can you afford

Your funding needs and how much loan you can afford may differ. When getting a working capital loan, you’ll have to take into consideration additional costs such as interest rates and fees. Knowing your budget protects your business from defaulting on repayments.

There are several factors to consider when determining your loan affordability:

Annual gross sales
Personal or business creditworthiness
Current debts owed
Financing type
Lender

As a general rule, lenders will assess your debt-to-income ratio, optimally looking for a DTI of 36 percent or less. It may also consider your debt service coverage ratio, a ratio that considers whether your operating income can cover your debts by at least 1.25. You can use a business loan calculator to determine your monthly payments and see whether you can afford a new business loan.

Bankrate insight

To get an idea of business loan interest rates based on loan type or credit score, check out the following guides:

Compare working capital loans and lenders

Comparing lenders and loan types can help you choose which working capital loan to get. Check each lender’s fees, interest rate and terms of repayment. You should also consider the application process, whether you have to have a business checking account, how fast you can get funding and how the lender handles customer support.

Lender requirements can vary. Ensure you understand the lender’s working capital loan eligibility requirements so you can prepare for the application process ahead of time.

Examples of working capital lenders

Lender	Type of working capital loans	Top features
Bank of America	Line of credit, Term loan	Option for unsecured lines of credit with lower annual revenue of $100,000 Low annual revenue requirement of $50,000 for cash secured line of credit Repayment terms of one to five years for term loans
Wells Fargo	Line of credit	Multiple line of credit options for businesses, including businesses with two or more years or less than two years of time in business Some lines come with automatic enrollment in rewards program
OnDeck	Term loan, Line of credit	Fast application process and fast funding if approved Lower eligibility requirements: one year in business, $100,000 in annual revenue, personal credit score of 625 Prepayment incentive
National Funding	Term loan	Fast application process and fast funding if approved Early payoff discount Accepts six months in business
Taycor Financial	Term loan, Line of credit	Loan amounts up to $1 million Personal guarantee required Accepts a short three months in business

Gather required documents and information

When getting a working capital loan, you should carefully review the application process and what documents the lender requires.

Personal information may be required, even if the lender doesn’t need a personal guarantee. Be prepared to provide your full name, date of birth, address and Social Security number.

You may also need legal documents for the business, including:

Articles of incorporation
Your LLC operating agreement
Ownership structure
Business name registration
Business tax returns
Bank statements
Profit-and-loss statements
Outstanding debt information

Secured business loans require proof of collateral and possibly an appraisal. If you’re applying for an SBA loan, you’ll probably also need a business plan, business history summary, lease information and financial projections.

Apply for a working capital loan

After gathering the necessary information and documents, you should be ready to apply for the working capital loan. Many lenders offer an online application through their website but applying face-to-face in a branch location might also be an option.

Early preparation will streamline the application process, leading to faster approval and funding. If more information is necessary during the underwriting process for approval, the lender will usually reach out by email or phone. Some lenders offer the ability to check your application progress online. After approval, you should receive funding within a few days.

Bankrate insight

In some cases, your business loan may be denied. To help you decide what to do next, check out these guides:

Repayment strategy

Setting up the right repayment strategy before applying for a working capital loan can help prevent loan default. To manage your loan properly, you should:

Make sure you understand your loan agreement.
Have a realistic business budget setup and plug in your business loan repayment.
Pay your bills on time to prevent late fees, penalties and default.
Minimize other debts, especially for loans with short repayment terms.
Check your personal and business credit scores regularly.
Speak with your lender before missing a payment to learn your options.

Bottom line

Getting a working capital loan is a great way to pay operating expenses or boost working capital for other purposes such as expanding your business. Taking the proper steps before applying for a short-term business loan can help you get the best loan terms and repayment structure.

Frequently asked questions

The credit score you need for working capital depends on the lender and loan type. The lowest qualifying credit score is as low as 500, but having a higher credit score can provide better repayment terms and more funding options. Most lenders require businesses to be established for at least six months to two years and have a minimum annual revenue of $100,000.
You can get a working capital loan with bad credit if other business requirements, like your annual revenue and time in business, are strong. Being in a less risky business industry can also improve your approval chances. If you have collateral to provide, like real estate, equipment or accounts receivable, consider a secured short-term business loan instead of an unsecured loan.
What happens if you default on a working capital loan depends on the loan type. For example, the lender can seize the property or equipment you used as collateral for a secured business loan. If you default on an unsecured business loan, your personal assets can be taken if you sign a personal guarantee. You may be eligible for deferment or settlement options if you have an SBA short-term business loan. If you can’t repay a working capital loan, the best course of action is to speak with your lender to see the available options.